Construction Budget Evaluaton

Evaluation of construction or
implementation budgets with
explicit consideration of
uncertainties
Simplified determination of
the probability of exceeding
construction/implementation budgets

Riskope International SA ©, 2007-*, www.riskope.com
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700% over-cost!! “infinite” over-cost as the generally 150-300%
selected structure proved over-cost
useless

Exceeding of budgets may arise from:
• quantities’ and other uncertainties
•construction/implementation hazards
2

The application discussed herein is a
subset of the
Comparative Decision Analysis
(CDA, © Riskope International, 2007-*)

presented in the book
“Improving Sustainability through Reasonable
Risk & Crisis Management” by F. & C. Oboni,
2007

3

Example/Case
study:

a company has
100M$ budget
available to
build a facility

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The classic approach would be:
• To design the facility (may be in several
staged refinement steps)
• To estimate its costs based on quantities
• Evaluate contingencies (generally a lump
sum amount, let’s say 15%)
• Check if that estimate fits within the
budget
• Decide to go ahead or re-design.
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…and a typical result would be, for
example:
– Cost estimate 90M$ with possible:
• 5% economy
• 15% increases

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Which translates into the following
forecasted costs:

Min cost= 90-0.05*90= 85.5 M$
Average cost= 90.0 M$
Max cost= 90+0.15*90= 103.5 M$

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It is very difficult to:
•Take these numbers and integrate them into a
coherent risk management approach
because we do not know the probabilities of
occurrence of those costs, and risk tolerability
cannot be checked

•Understand what the real variability of the project
cost could be.

These difficulties can be overcome by using
the Riskope’s application
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To use the Riskope’s application a
simple

table of potential over-costs (+,-) is built for a
pre-designed list of potential construction
hazards

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NB: Potential over costs are entered as positive values,
Potential under-costs as negative values (M$) Min (M$) Ave (M$) Max (M$)
Some materials available in OR they may be in
may be: abundance high demand,
21
-3 7
when needed, thus costlier
thus cheaper than foreseen

Some elements easier than OR more difficult
of the system foreseen to to build
1 3 7
may prove: build (thus (increasing the
cheaper) costs)

The economy down, thus labor OR high, thus
-1 6 16
may be prices will be labor prices
lower will be higher

Environmental good, thus no or OR bad, thus
Soundness little over- generating
0 1 2
may prove to costs due to over-costs for
compliance construction
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As soon as the values are entered,
the application computes:

• The probability that the budget will be
overcome
• The min and the max cost values

• The Monte Carlo simulation, loaded with hazardous assumptions is
not used!
• Assumptions are of course made to keep this approach as simple
as possible.

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In the example the result is that
the probability of exceeding the
initial budget of 110M$ is 22.5%

approximately 1/5, i.e. a little
more than getting a specific
number when rolling a dice (1/6))

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Translated into graphic for our example:
•The budget is the blue vertical line.
•The probability of exceedance of the budget is the area
underneath the orange cost function to the right of the blue
line.
0.16

Construction Analysis
0.14
Construction Budget ($)

0.12

0.1

0.08

0.06

0.04

0.02

0
0 20 40 60 80 100 120 140 160

As it can be seen the min and max values of the project cost cover a very
wide range, but their probabilities of occurrence are negligible.

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Once the values are known, then
the company can decide:
• whether they can afford the risk to go
ahead as is by comparing with their
tolerability criteria,
• how much money should be spent to
refine the project and reduce uncertainties

But more importantly:
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This application is the starting point
for using the CDA alternative
comparison system which:
• Overcomes the well known NPV fallacies
• Allows long term financial comparison of
design alternatives
• Sheds a lucid and transparent light on
alternatives potential flaws.

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Construction Budget Evaluaton

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