IntegratedCostSchedu..

© 2007 Hulett & Associates, LLC 1

Integrated Cost / Schedule Risk Analysis using Risk Drivers

David T. Hulett, Ph.D.Hulett & Associates, LLC

[email protected]

(310) 476-7699


Agenda

• Integrating project schedule risk results into the analysis of project cost risk

• Schedule risk analysis using risk factors• How cost risk is affected by schedule risk

– Labor and management hours– Escalation

• Risk factors in cost risk analysis• Decomposing the results


Cost and Schedule Risk Integration

“Burn Rate” Time Independent Costs

Variable Costs

Project Schedule Risk

Cost Risk

Risk

Time

Project Cost Risk


Using the

Risk Driver Method for the

Schedule Risk Analysis

See: “Using the Risk Register in Schedule Risk Analysis with Monte Carlo Simulation” by David Hulett & Waylon Whitehead, presented at the

2nd Annual Oil & Gas Project Risk Management Conference, Kuala Lumpur, Malaysia, 29th & 30th October, 2007


Risk Drivers Assigned to Simple Refinery Development Project

Construction of a new, large refinery: 67-month scheduleHammocks are included for the integration to cost risk


Schedule Risk Results

18/Apr/14 04/Nov/14 23/May/15

Distribution (start of interval)

0

50

100

150

200

250

300

350

Hits

0% 19/Nov/13

5% 12/Mar/14

10% 01/May/14

15% 27/May/14

20% 16/Jun/14

25% 03/Jul/14

30% 21/Jul/14

35% 06/Aug/14

40% 21/Aug/14

45% 04/Sep/14

50% 19/Sep/14

55% 03/Oct/14

60% 17/Oct/14

65% 05/Nov/14

70% 19/Nov/14

75% 04/Dec/14

80% 22/Dec/14

85% 08/Jan/15

90% 30/Jan/15

95% 11/Mar/15

100% 21/Aug/15

Cum

ula

tive F

requency

New RefineryEntire Plan : Finish Date

Schedule Date 3JAN14 = 2% likely

80th percentile = 22DEC14 about 11.5 months delay

P10 => P90 is 9 months


Contribution To the Time Contingency

Contribution to the Total Time Contingency

Risk Taken Out (100% mitigated)

80th PercentileMitigation Saved

Days % of Contingency

All Risks In 22-Dec-14

LLE Suppliers Busy 14-Oct-14 69 20%

Financing Difficult 21-Jul-14 85 24%

Construction Supervision 17-Jun-14 34 10%

Suppliers Busy 31-Mar-14 78 22%

Construction Logistics 26-Feb-14 33 9%

Vendor Reps for Commissioning 5-Feb-14 21 6%

Design Productivity 3-Jan-14 33 9%

Total Time Contingency 353 100%

The order is most efficient, but progression of days and percentages is not smooth because of the structure of the schedule


Some Problems with the Traditional 3-point Estimate for Activity Durations

• Can tell which activities are crucial, but not directly which risks are driving

• Makes poor use of the Risk Register that is usually available

• Cannot decompose the overall schedule risk into its components by risk driver. Ability to assign the risk to its specific risk drivers helps:– Management understand the rationale for the time

contingency reserve– Target risk mitigation


The Risk Driver MethodStart with the Risk Register Risks

• Use the Risk Register already compiled– Risk Register identifies high-priority risks with their

probability and impact– Quantitative Risk Analysis usually follows Risk

Identification and Qualitative Risk Analysis

• Assign risks to schedule activities– A risk can be assigned to several activities– An activity can have several risks assigned

• Compute Monte Carlo simulation results• Estimate sensitivity and net effect of key risks


Risk Drivers Mechanics

• The risk driver is assigned a 3-point “factor” reflects the uncertainty in the duration of activities it is assigned to– E.g., new technology risk may mean that design

activities’ durations are optimistically the base, most likely +10% and pessimistic + 30% of the base estimate. The factor is 100%, 110% and 30%

• Risk Driver is assigned a probability of occurring• These data come from interviews and

workshops with knowledgeable people


Simple Example of Risk Register Risks

• Collect probability and impact data on risks• Load the risks• Assign risks to schedule activities

Use the Risk Factors module available for Pertmaster v. 8.0


Risk Factor Applied to a 100 day Task (1)

90 95 100 105 110 115


0

50

100

150

200

250

Hits

0% 90

5% 94

10% 95

15% 96

20% 97

25% 98

30% 99

35% 99

40% 100

45% 101

50% 101

55% 102

60% 103

65% 104

70% 104

75% 105

80% 106

85% 108

90% 109

95% 111

100% 115

Cum

ula

tive F

requency

0010 - Construction : Duration

Here the Ranges are based on deviations + and – from the Plan. Probability is 100%


Risk Factor Applied to a 100-day Task (2)

100 110 120 130


0

20

40

60

80

100

120

140

160

180

200

Hits

0% 100

5% 104

10% 105

15% 107

20% 108

25% 109

30% 109

35% 110

40% 111

45% 112

50% 113

55% 114

60% 115

65% 116

70% 117

75% 118

80% 119

85% 121

90% 122

95% 125

100% 130

Cum

ula

tive F

requency

0040 - Technology Design : Duration

Here the Plan is the Optimistic Value. Probability is 100%


Assigning a Probability Less than 100%

• The essence of “risk” is the uncertainty – Uncertainty of its occurrence, specified by a

probability– Uncertainty of its impact, specified by a range of

durations

• If the risk may or may not occur, we specify the probability that it will occur– The risk “occurs” and affects the activities it is

assigned to on X% of the iterations, chosen at random

– On (1 – X)% of the iterations, the plan value is used


Assigning a Probability less than 100%

100 110 120 130


0

200

400

600

800

1000

1200

Hits

0% 100

5% 100

10% 100

15% 100

20% 100

25% 100

30% 100

35% 100

40% 100

45% 105

50% 107

55% 109

60% 110

65% 111

70% 113

75% 114

80% 116

85% 118

90% 120

95% 123

100% 130

Cum

ulat

ive

Freq

uenc

y


95 100 105 110 115


0

500

1000

1500

2000

Hits

0% 91

5% 97

10% 99

15% 100

20% 100

25% 100

30% 100

35% 100

40% 100

45% 100

50% 100

55% 100

60% 100

65% 100

70% 100

75% 100

80% 100

85% 101

90% 103

95% 107

100% 115

Cum

ulat

ive

Freq

uenc

y

0010 - Construction : Duration

Spike contains 70% of the probability

Spike contains 40% of the probability


Assigning More than One Risk to an Activity

• If more than one risk is acting on an activity, the resulting ranges are the multiplication of the percentages– Risk 1 has 90%, 100% and 115%– Risk 2 has 100%, 110% and 130%

• The risk factors are selected at random for each risk driver

• Risk factors assigned are multiplied together• The resulting factor is multiplied by the activity

duration for that iteration


Two Risks affect One Activity using Factors

100 110 120 130 140


0

20

40

60

80

100

120

140

Hits

0% 93

5% 102

10% 104

15% 106

20% 108

25% 109

30% 110

35% 111

40% 113

45% 114

50% 115

55% 116

60% 117

65% 118

70% 119

75% 121

80% 123

85% 124

90% 127

95% 130

100% 144

Cum

ula

tive F

requency


Range from 90 to 150 days, Peak about 113 days


Two Risks with Less than 100% Probability Affecting one Activity

100 110 120 130 140


0

100

200

300

400

500

600

700

800

900

1000

1100

Hits

0% 91

5% 97

10% 99

15% 100

20% 100

25% 100

30% 100

35% 100

40% 100

45% 101

50% 102

55% 104

60% 106

65% 108

70% 110

75% 111

80% 113

85% 116

90% 119

95% 123

100% 144

Cum

ula

tive F

requency


The spike at 100 days represents (1) the likelihood that neither risk occurs and (2) the chance that 100 days is picked when one or both occur


Schedule Risk Drivers


Which Risks are Most Important

• Traditional schedule risk analysis calculates the sensitivity of the schedule risk to the activities that are risky. This is not satisfactory to some:– This approach emphasizes the effect of the risks, not

the risks themselves– There is another step from “risky activity” or “risky

path” to “Which risk should we mitigate?”

• The Risk Driver approach emphasizes the risks and is specific about which risks to mitigate


Risks Drive the Contingency

• Use the Risk Drivers to “explain” the 11 ½ month contingency to the 80th percentile

• Make the link between risks and effects explicit and direct

• The project manager needs to determine how cost-effective the mitigation can be


Which Risk is Most Important?Use the Risk Driver Tornado

1 - LLE suppliers may be busy

5 - Financing may be difficult

2 - Construction supervision may be scarce

6 - Vendor reps may be scarce for commissioning

3 - Suppliers may be busy

7 - Design productivity may differ from our expectations

4 - Construction logistics may be different from plan

0.00 0.10 0.20 0.30 0.40 0.50 0.60

Correlation

Driving Schedule Risk Factors

2 risks may be candidates for mitigation top priority


Contribution To the Time Contingency (repeat)

Contribution to the Total Time Contingency

Risk Taken Out (100% mitigated)

80th PercentileMitigation Saved

Days % of Contingency

All Risks In 22-Dec-14

LLE Suppliers Busy 14-Oct-14 69 20%

Financing Difficult 21-Jul-14 85 24%

Construction Supervision 17-Jun-14 34 10%

Suppliers Busy 31-Mar-14 78 22%

Construction Logistics 26-Feb-14 33 9%

Vendor Reps for Commissioning 5-Feb-14 21 6%

Design Productivity 3-Jan-14 33 9%

Total Time Contingency 353 100%

The order is most efficient, but progression of days and percentages is not smooth because of the structure of the schedule


Take the Risks Out One at a Time

22/

Dec

/14

14/

Oct

/14

21/

Jul/1

4

17/

Jun/

14

31/

Mar

/14

26/

Feb

/14

05/

Feb

/14

03/

Jan/

14

22/Nov/13 02/Mar/14 10/Jun/14 18/Sep/14 27/Dec/14 06/Apr/15 15/Jul/15

0%

20%

40%

60%

80%

100%

Cum

ulat

ive

Pro

babi

lity

Distribution Analyzer Report

No Design Productivity Risk - Finish Date

No Vendor Rep Risk - Finish Date

No Construction Logistics Risk - Finish Date

No Supplier Busy Risk - Finish Date

No Construction Supervision Risk - Finish Date

No Financing Risk - Finish Date

No LLE Supplier Risk - Finish Date

All Risks In - Finish Date

Represents perfect

mitigation – an unrealistic goal


Integrating the

Schedule Risks into the

Cost Estimate Risk Analysis

and

Using the

Risk Driver Method for the

Cost Risk Analysis

Recognition is due to the work of Waylon Whitehead on applying the Risk Driver Method to cost risk analysis


Refinery Construction Project Baseline Estimate

($ millions)

Cost CategoryLabor Equipment Total

Direct Field Costs

Long Lead Equipment (LLE) 15 330 345

Equipment 30 1,200 1,230

Materials 288 1,935 2,223

Total Direct Field Costs 333 3,465 3,798

Indirect Field Costs

Supervision 360 0 360

Time-Related Overhead 315 0 315

Total Indirect Field Costs 675 0 675

Total Direct & Indirect Costs 1,008 3,465 4,473

Construction Management 630 630

Material Related 180 540 720

Home Office Engineering Staff 540 540

Overhead & Fees 560

Total Contractor Related 2,358 4,005 6,923

Owner-Related

Project Management Team 450 0 450

Materials 0 400 400

Total Owner-Related 450 400 850

TOTAL BASE ESTIMATE 7,773

Escalation 1,067

TOTAL BASE ESTIMATE incl. Escalation

8,840

Baseline Estimate $7,773 million plus escalation

Usually the contractor will add a contingency

We will strip that out and re-estimate it using Risk Drivers


Summary Cost Risk Results with Integrated Schedule Risk

No Risk Cost and Schedule Risk

($ millions) 80th Percentile Difference

Base Estimate 7,773 7,773 - 0 -

Contingency* 1,010 2,086 1,076

Total including Contingency 8,783 9,859 1,076

Escalation 1,067 1,532 465

Total including Contingency and Escalation

9,850 11,363 1,513

*Assuming the estimators put a 13% contingency on their estimate


Identifying the High-Priority Risks to Cost

Risk DriversEstimate Incl. Contingency

Effect of Eliminating Risk on the Contingency

All Risks In 9,859 Contribution

Risks Taken Out: $ %

1. Contracting Strategy 9,450 409 20%

2. Design Changes 9,072 378 18%

3. Direct / Indirect Labor Delays 8,838 234 11%

4. Availability of Key Staff JV / PMT 8,659 179 9%

5. Equipment Cost 8,502 157 8%

6. Integration Management 8,357 145 7%

7. Labor Rate 8,232 125 6%

8. Construction Labor Productivity 8,133 99 5%

9. Bulks Cost 8,041 92 4%

10. Construction Management Delays 7,981 60 3%

Others 7,773 208 10%

Total Contingency 2,086 2,086 100%


Base Including Contingency

Base without contingency; $7,773, Contingency adds $2,086 or 27%


Escalation

Base Escalation is $1,067. Escalating the contingency and risking the centroids add $465 million or 44%


Total Risked Including Contingency and Escalation

Assuming the estimators had put a 13% contingency on the original base estimate for a $9,850 all-in value, our estimate

adds $1,513 or 15%


Cost Risk Analysis using Risk Drivers and Schedule Risk Information

• Use the Risk Drivers in the Cost Risk Analysis• Use the results from the schedule risk analysis

– To drive time-dependent costs• Compute the monthly “burn rate”• Multiply the burn rate by the number of months

from the schedule risk Use the results from the – To drive escalation

• Costs are escalated to the centroid of their spending activity

• Schedule risk drives those centroids


Risk Drivers in the Cost Risk Analysis

• Three-point impact is measured in percentage terms (“factors,” e.g., 90%, 100%,115%)– For each iteration the factor is selected at random

from the 3-point estimate– The factor will multiply the baseline cost of the line-

items to which it is assigned for that iteration – If two or more factors are assigned, they are all

multiplied by the cost. If no factor occurs in an iteration, its value is 1.0 and has no effect on the duration

• Parallel to the Risk Driver approach in schedule


Example of Risk Drivers for the Cost Risk Analysis

Risk Driver ProbabilityFactor Range

OPTD MOST PESS

Shareholder Alignment & Performance

70% 0.90 1.00 1.30

Competition for Long Lead Equipment 60% 0.90 1.10 1.30

Availability of Quality Key Staff - JV & PMT

90% 0.95 1.10 1.20

Contracting Strategy 80% 0.95 1.05 1.20

Quality of ITB Packages 25% 0.90 1.00 1.20

Design Change 60% 0.95 1.05 1.20

Equipment Cost 85% 0.93 1.04 1.20

Construction Labor Productivity 100% 0.90 1.00 1.30

Labor Rate 100% 0.90 1.03 1.20

Site Soil Conditions 70% 1.00 1.20 1.50

Bulk Material Cost 85% 0.95 1.00 1.15

Integration Management 90% 0.95 1.05 1.20


Risk Drivers are Assigned to the Activities they Affect

• Risk Drivers are factors that multiply the cost estimate for a line item– For time-related costs like labor, they affect the burn

rate– For time-unrelated costs like equipment, they affect

the estimate directly

• Risk Drivers have a probability of occurring– If they occur, their value is taken at random from their

distribution (triangular is assumed here)– If they do not occur on some iteration, their value is

1.0 and they do not affect the result


Integrate Schedule Risk into the Cost Risk Analysis: Calculate Burn Rates

Schedule Span for Time-Related Costs

Baseline ($ millions)

Start End MonthsBase Cost Estimate

Burn Rate / Month

Direct and Indirect Field Costs 28-Jun-10 19-Jul-13 36.7 1,008 27.4

Construction Management 15-Nov-10 19-Jul-13 32.1 630 19.6

Material Related 28-Jun-10 19-Jul-13 36.7 180 4.9

EPC Home Office Detailed Engineering

8-Feb-10 28-Oct-11 20.6 540 26.2

Project Management Team 8-Feb-10 3-Jan-14 46.8 450 9.6

Burn rates for time-related costs are calculated by dividing the labor estimate by the months in the Baseline Schedule for the appropriate schedule concept (span). Average burn rate does not account for ramp-up and ramp-down or mobilization and de-mobilization.


For Time-Related Costs, Schedule Risk Results are Substituted for the Baseline

Schedule Span

Baseline From the Schedule Risk Results

MonthsAverage Months

Fitted Distribution

Direct and Indirect Field Costs 36.7 42.4 Logistic

Construction Management 32.1 34.0 Maximum Extreme

Material Related 36.7 42.4 Logistic

Home Office Detailed Engineer. 20.6 21.2 Maximum Extreme

Project Management Team 46.8 53.1 Weibull

Distributions are fitted from the schedule risk simulation results (3,000 iterations) using Crystal Ball Fit. We use the best fitting distribution.

Distributions are correlated (corr. coeff. = .9) in the cost risk analysis because it would be unrealistic that one span would be long and another short in the same iteration


Weibull fits PMT Span

Use Crystal Ball to fit the 3,000 iteration results for the span required


Logistic fits Direct & Indirect Field Span

Logistic has best score on two of the three criteria. With a spike (from risk factor’s probability) the fit is not great.


Calculating Escalation With Schedule Risk

• Escalation is calculated:– From 2 June 2008– To the centroid of the activity being escalated

• Schedule risk extends the centroid if the phase:– Starts later because of risk in the predecessors– Lasts longer because of risk affecting that phase’s

activities


Schedule Risk makes Centroid Later and Increases Time for Escalation

Predecessor Successor

Centroid

Predecessor Successor

Centroid

No Schedule

Risk

With Schedule

Risk

Date

2JUN08

<= Escalation Period =>

<= Escalation Period =>


Escalation is applied to Categories

Escalation Calculation Categories

Simulated Months to Centroid

Estimate Escalation Cost CategoryBase:

No RiskAvg. from

Schedule Risk

540 Detailed Engineering Months 30.6 33.1

330 Long Lead Equipment Months 17.5 19.6

1,200 Equipment Other Months 36.4 38.6

1,935 Bulks Months 36.4 38.6

1,638 Construction Months 45.6 52.0

450 Owners PMT Months 43.8 48.8

400 Owners Other Months 48.4 55.1

560 Overhead & Fees Months 43.8 52.4

720 Material Related Months 48.4 55.1

7,773 TOTAL BASE ESTIMATE

Schedule risk adds

some months to

each centroid

Estimate that is escalated is

from the simulation: Hence we

escalate the contingency

like any other cost


Durations Used for the Months to the Centroid are Correlated in the Cost Risk Analysis

• In simulation, the schedule risks are entered as – Fitted distribution from the schedule risk analysis– In months from 2 June 2008 to the Centroid

• Since spans all come from the same schedule, they will be all long or short together in any iteration. They are correlated (.9) in the cost risk simulation


Escalation Rates

• Escalation rates used are:– 2008: 4.5%– 2009: 4.0%– 2010: 3.5%– 2011: 3.5%– 2012: 3.0% and for later years

• We have put a .9, 1.0, 1.1 risk factor on these to represent uncertainty– These factors are correlated .9


Summary Cost Risk Results with Integrated Schedule Risk (repeat)

No Risk Cost and Schedule Risk

($ millions) 80th Percentile Difference

Base Estimate 7,773 7,773

Contingency* 1,010 2,086 1,076

Total including Contingency 8,783 9,859 1,076

Escalation 1,067 1,532 465

Total including Contingency and Escalation

9,850 11,363 1,513

*Assuming the estimators put a 13% contingency on their estimate


Effect of Including Schedule Risk Results

• Schedule risk analysis results enter:– As they affect the total labor and other time-related

costs identified– As they affect the centroids of the various categories

of costs escalated


Effect of Including Schedule Risk

No Risk Cost Risk @ 80th Percentile

($ millions)Including Schedule

Risk

No Schedule Risk

Effect of Schedule Risk on Cost Risk

Base Estimate 7,773 7,773 7,773 - 0 -

Contingency 1,010 2,086 1,660 426

Total incl. Contingency 8,783 9,859 9,433 426

Escalation 1,067 1,531 1,307 224

Total incl. Contingency and Escalation

9,850 11,363 10,727 636

Note: Assuming the estimators put a 13% contingency on their estimate

Even with no schedule risk the Contingency is $1,660 million vs. an assumed $1,010 million if the estimators included 13%. With schedule risk the contingency is $2,086 million.


Effect of Risk Drivers

Sensitivity helps

decide what to mitigate

first

Correlation confuses

the selection of the highest priority Risk

Driver


Identifying the High-Priority Risks to Cost (repeat)

Risk DriversEstimate Incl. Contingency

Effect of Eliminating Risk on the Contingency

All Risks In 9,859 Contribution

Risks Taken Out: $ %

1. Contracting Strategy 9,450 409 20%

2. Design Changes 9,072 378 18%

3. Direct / Indirect Labor Delays 8,838 234 11%

4. Availability of Key Staff JV / PMT 8,659 179 9%

5. Equipment Cost 8,502 157 8%

6. Integration Management 8,357 145 7%

7. Labor Rate 8,232 125 6%

8. Construction Labor Productivity 8,133 99 5%

9. Bulks Cost 8,041 92 4%

10. Construction Management Delays 7,981 60 3%

Others 7,773 208 10%

Total Contingency 2,086 2,086 100%


Summary: Introduce Risk Driver Method and Integration of Schedule Risk into Cost Risk

• The Risk Driver Method – Focus on the Risks themselves, not the activities or cost line-items that are impacted by the risks– Derive the standard results: probability of success

and contingency reserve needed for any degree of safety

– Create a prioritized lists of risks to explain to management how the contingency occurred and for focusing risk responses on the risks themselves


Summary (2)

• Integration of schedule risk into the cost risk – Elongations of the duration of work for the time-

dependent resources (labor, supervision) can increase the cost estimate. In our example the contingency was increased by $426 million or 26%.

– Delay in the schedule can increase the expected impact of escalation. In our example the escalation increased by $224 million or 15%. We are escalating the contingency just like any other project cost element


Integrated Cost / Schedule Risk Analysis using Risk Drivers

David T. Hulett, Ph.D.Hulett & Associates, LLC

[email protected]

(310) 476-7699

IntegratedCostSchedu..

Economy & Finance

risk driver risk factors

percentages risk

risk factorapplied

risk identification

percentile risk

essence of risk

schedule risk drivers

schedule risk labor