This document summarizes and compares two capital projects, Case A and Case B, in terms of their risk management approaches. Case A took a single point estimate approach which resulted in fixed contingency amounts, while Case B took a range analysis workshop approach to identify and quantify risks. Case B developed cost and schedule ranges and analyzed key risk drivers, allowing them to model outcomes more accurately. Best practice for risk analysis involves taking a risk-driven, integrated cost-schedule approach to understand contingency needs and prioritize top risks.
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1. Capital ProjectsRisk Development and ManagementChristiane KampschulteParsons Brinckerhoff16th August 2010 2:30-3:15pm The most comprehensive Oracle applications & technology content under one roof
2. Introduction The presentation addresses Risk management in terms of quantitative Risk Management not qualitative scoring methods. The presentation compares two projects. To validate the effectiveness of Risk Management statistically we require more examples and case studies. None of the Project are as per “Best Practice” which is dealt with at the end.
3. Introduction There are a number of uncertainties in every project that have a potential to affect the outcome. Commonly, the provision for these uncertainties is taken care of by adding a percentage of costs as contingency to the cost estimate and adding a time contingency at the end of the longest path.
4. Introduction The paper compares 2 similar projects and: Highlights the importance of calculating and documenting a meaningful cost and schedule contingency. Illustrates the benefits of project cost and time estimate range reviews.
5. CASE STUDY A : Mining Infrastructure Project in Western Australia
6. Rail Construction TD-Graph Capping Tracklaying Bridges Commissioning Activities Target Track Actual Track Layed Hand Lay2 Hand layed Cloud Break PORT 250 COMMISSIONING & Stockpiling Target No Later then date 220 190 Bridge 8 Chainage (km) 160 Bridge 7 Bridge 6 Bridge 5 130 100 Bridge 4 Bridge 3 70 Bridge 2 40 Bridge 1 Actual Track 10 Layed Hand layed Loop 16-Nov-07 21-Sep-07 11-Jan-08 27-Jun-08 2-May-08 27-Jul-07 7-Mar-08 1-Jun-07 6-Apr-07 -20 CASE STUDIES
7. Cost and time estimates were based on information given by Engineering Design Team. The project started with a single point cost and time estimate. The single point estimate resulted in a contingency linked to the time and cost estimate. This was a fixed percentage added to the cost estimate and a fixed number of days added to the project programme. Case A
8. Execution phase risk management workshops were conducted at regular intervals but inputs were taken from a Safety perspective and risk were not quantified. The contractors were required to submit a time scaled detailed network program, hours spent and forecasts. No alliance partner's forecast showed schedule or cost overrun. Schedule updates always showed a date within the required dates. Case A
9. Variations were approved while the cost value did not surpass the project single point estimate. No other number than the original estimate was ever communicated for time and cost. Case A
10. The project was being built in a Cyclone prone area and was under a high cyclone danger zone. A cyclone hit the area and one of the 3 worker accommodation camps a was damaged. Case A
11. This incident triggered the intensive review of the project’s time estimate and cost estimate with focus on the assumptions made for calculating the contingency. The finding were that the scope hat deviated from the initial estimate. The assumptions made for the calculation of time and cost contingency were not treaceableso couldn’t not be evaluated for their adequateness. Case A
12. CASE STUDY B : Coal Terminal Project in New South Wales
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14. A Range Analysis Workshop (RAW) was held to identify and quantify all risks and uncertainties that could cause a deviation to the estimate. Particular attention was paid to the facilitation of this workshop where project participants were encouraged to come up with extreme outcomes of the uncertainties. Case B
15. Examples for risk sources considered in the RAW were: Availability of area or facility, staff availability and major equipment. Uncertainty over productivity level on the project. Adverse environmental conditions Specific risks identified for the project that have the potential to impact the project like geotechnical conditions, Industrial Relations, Quality. Case B – Risk sources
16. For awarded contracts, capital cost sources that were considered were uncertainty associated with variations that have been submitted, uncertainty with forecast variation and uncertainty associated with emerging trends. Case B - Risk sources
17. Capital cost inputs that were considered for un-awarded contracts typically included variations in project scope that were being developed at that stage, variations in unit rates considering the time lag between feasibility study and project execution, variations in quantities-both materials and work hours which are impacted by the stage of the design process and risk events specific to the project. Case B - Risk sources
18. The schedule risk profile was developed through a summary risk schedule developed from the project schedule that captured the key milestones and the associated near critical activities. Duration ranges were developed for these activities in a facilitated workshop. These ranges were defined by the minimum case, maximum case, P10, P90 scenarios and probability of achieving or improving the task duration. The ranges were then used to develop a probability distribution for the activity. Correlations between the ranged schedule activities were also included. Case B – Schedule range analysis
19. Case B – Schedule range analysis Key Drivers of the Project completion milestone
20. Awarded contracts – models cost uncertainty due to variations. Un-awarded contracts – modeled uncertainty associated with the estimate of these contracts. Owners – models uncertainty associated with owner’s costs. Project Risks – models the risks that have been identified. Project Scope – models potential scope changes for the project. Schedule – models the time variable uncertainty associated with schedule duration risk. Case B – CAPEX range analysis
21. Case B - CAPEX Range analysis Schedule range analysis Cost range analysis
22. Case B - Risk model Mean P95 P5 Capital Cost Key Capital risk drivers
25. Integrated cost-schedule risk analysis The purpose of this is to estimate the appropriate level of cost contingency reserve on projects and also to include the impact of schedule risk on cost risk. Best Practice (as per AACE recommendation)
26. Start with a “good” logic driven schedule (summary schedule) Assign cost loaded resources to the activities in the schedule Take a risk driven approach. Use the “Risk Register”. Collect good risk data from facilitated workshop or one to one interview with stakeholders or project participants. Derive contingency reserve of time and cost, prioritize the risks and mitigating them in steps. Best Practice
27. Risks are identified during a qualitative risk analysis of the project. This leads to a list of prioritized risks which are characterized by their probability and impact ranges. A best practice project schedule which is resource loaded. The “Neat Estimate” (an estimate without contingency) assigned to the activities in the schedule. Best Practice - Inputs
28. From the inputs, a risk model would be created in a readily available software like “Primavera Risk Analysis V8” (Pertmaster) ready to run a number of iterations simulating the project Risk # 01 – P50% Factors 0.95,1.05,1.15 Activity A Activity B Best Practice - Model
31. Answers we get Which risks are most important to the achievement of the project schedule and cost estimate? How likely are the project plan’s cost and schedule targets to be met - taking into account the risk that may affect that plan? How much contingency of time and cost needs to be provided to meet the risk threshold of the project management or other stakeholders?
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