Range analysis resources for commercial applications

February 2020

Overview

Broadleaf has extensive expertise in schedule and cost range analysis, sometimes called probabilistic risk analysis or quantitative risk analysis, for major projects and related analysis for commercial applications. We have been conducting such analyses for large clients around the world for many years.

This tutorial summarises some of the resources and case studies available on our web site, with a particular focus on commercial and non-project case studies.

Broadleaf resource material

A tutorial that summarises our views about good practice when conducting range analysis is available here.

Specific material covering project applications is provided in our tutorial here.

Additional information is available in our book, Project Risk Management Guidelines: Managing Risk with ISO 31000 and IEC 62198 (link here).

Broadleaf case examples

Applications of the processes described in our resource material are described in numerous case studies on our web site. Project-related cases are provided separately here, categorised broadly into:

Cost range analyses
Schedule range analyses
Integrated schedule and cost range analyses, where schedule uncertainty drives indirect and other time-variable costs, cash flows and net present value (NPV) estimates.

This tutorial focuses on other applications of quantitative analysis that incorporate or depend on range analysis, often associated with commercial activities rather than projects.

Case study index

The following index shows the case studies and keywords associated with each one. Details and links are in subsequent table.

CASE STUDY	KEYWORDS	APPLICATION
Achieving the life-of-mine plan	Capital investment, Funding, Hedging, Culture change	Commercial
Business case for a wind farm	Investment, Cash flow	Commercial
Corporate systems disaster recovery cost-benefit analysis	Disaster recovery, Hot standby, Cost benefit	Commercial
How much is a forest worth?	Tender evaluation, Public sector comparator	Commercial
Quantitative financial risk analysis for a European shopping centre	Property development, Investment evaluation	Commercial
Quantitative risk-based comparison of options	System procurement, Option comparison	Commercial
Risk modelling to support commercial decisions	Building construction, Bid price, Narrow margins	Commercial
Risk-adjusted forecast of EBIT	Risk adjusted EBIT, Market announcement	Commercial
Setting a risk-based limit of liability in a contract	Procurement, Risk based limit of liability	Commercial
Switchyard protection fire risk	Insurance, Business continuity, Cost-benefit analysis	Commercial
Valuing carbon in a plantation investment	Carbon sequestration, NPV, IRR	Commercial

Commercial applications
CASE STUDY	SUMMARY
Achieving the life-of-mine plan Link here	The operator of a large gold province needed to incorporate risk and uncertainty in its Life-of-Mine Plan (LMP), which was its main strategic plan. The LMP formed the base for a simplified model of the mine operations over a multi-year period. Managers developed scenarios and estimates for the variability in key inputs to the plan, from which we generated distributions of the main financial and operating measures of performance for the mine. These were important inputs to: Capital investment plans for the operator, and funding plans for the owners Long-term capital structure and funding analysis for the owners Hedging strategies for the owners and their treasury functions. Requiring quantitative estimates encouraged managers to think in detail and with some numerical precision about their areas of responsibility. Their awareness and understanding was enhanced, leading to greater flexibility and responsiveness in their plans and greater organisational preparedness. The sponsor for the risk analysis reported a very positive cultural change following the exercise.
Business case for a wind farm Link here	Broadleaf worked closely with the proponent of a wind farm development to assist in constructing a business case and an information memorandum for potential investors. Our work was particularly concerned with aspects of uncertainty in the business. Quantitative risk analysis was used to model the uncertainty in the timing and cash flow forecasts through development and into operation across a portfolio of wind farms. This case outlines some of the more interesting features of our work.
Corporate systems disaster recovery cost-benefit analysis Link here	A large multinational company consolidated its business systems into a single global system. The scale of the system and the sense that the business was putting all its eggs in one basket raised concern about disaster recovery. We facilitated a risk assessment of the new system’s possible modes of failure, constructed failure models that represented uncertain events and uncertain quantities, and evaluated them to assess the annual average cost and peak exposure. The analysis concluded that the fixed annual cost of a hot standby system was about ten times as much as the forecast annual value of bearing the risk, and that even the peak exposure was bearable in the context of the turnover of the business.
How much is a forest worth? Link here	We developed financial models to assist a government forestry business to evaluate bids from the private sector. We modelled the returns from private sector bids and compared them with the returns from the reference project, which is the project as it would be undertaken by a public sector entity using the most likely and efficient form of delivery that would satisfy the requirements. If a private sector proposal could not provide returns at least those of the reference project, then it would not be worth pursuing.We set out to build simple, flexible models. We used a cash-flow structure with only a few key revenue and expense variables for each land package. Detail was reserved for the individual land packages and their combinations. The focus on sources of variation that differentiated between the reference project and the proposed investment was a further factor that allowed the financial models to be simplified significantly.
Quantitative financial risk analysis for a European shopping centre Link here	We undertook a quantitative financial risk assessment of a large European shopping centre to support decisions about the preferred redevelopment options. We developed a high-level financial model of the centre, to examine its overall value under a ‘neighbourhood’ redevelopment scenario We worked with the local team, plus specialist advisers, to quantify the main drivers of uncertainty in the centre’s value We ran the quantitative model with the identified uncertainties included, and we reviewed and discussed the financial outcomes with the development managers.
Quantitative risk-based comparison of options Link here	This case study summarises a quantitative range analysis of the possible costs associated with each of two options for the procurement of an Asset Management and Maintenance System. It demonstrates a straightforward quantitative approach to comparing options. It generated far more insight than could be obtained from a simple comparison of the initial quotes from software vendors. The analysis stimulated intense discussion among senior project team members that resolved several misunderstandings and helped to develop a level of shared understanding that had not existed prior to the analysis.
Risk modelling to support commercial decisions Link here	The commercial construction industry operates on narrow margins in an environment where costs can be volatile and the timing of cash flows can be affected by many factors beyond the control of the business. Close attention to costs and cash flow management is crucial to achieving sustained success. The work described in this case study supports commercial decisions on whether and how to respond to requests for tender. Two aspects were important: The cost estimates developed when preparing tender responses The forecast cash flows of the proposed projects.
Risk-adjusted forecast of EBIT Link here	This case concerns a listed company that has the usual requirements for regular, accurate reporting to the securities exchange. Quantitative range analysis was used to develop a risk-adjusted forecast of earnings before interest and tax (EBIT) for the new CEO. He wanted a sound estimate of EBIT that he could announce to the market with a high degree of confidence that it could be achieved.
Setting a risk-based limit of liability in a contract Link here	This case describes the estimation of a risk-based liability cap for a high-value, complex procurement contract. An estimate of potential liabilities, based on scenarios that might arise and their implications, provided a sound basis for negotiating liability terms in the contract. We conducted a detailed quantitative analysis of liability scenarios, their likelihoods of occurrence and their cost implications, to develop a quantitative justification for specific contractor liability limits.
Switchyard protection fire risk Link here	The results of a fire study were combined with estimates of the time required to rebuild HV switchgear and of the cost of doing so, as well as assessments of the likelihood of a fire from similar facilities elsewhere. A model of catastrophic loss of power was developed and the NPV of foreseeable losses was assessed over twenty-five years.
Valuing carbon in a plantation investment Link here	A forestry company sought to highlight and compare the risk profiles of the market returns from sequestered carbon and timber arising from a typical first-rotation softwood plantation investment. It wished to examine the merits and opportunities of splitting or retaining single ownership of the products. We produced a model to compare the net present values (NPVs) and internal rates of return (IRRs) of future cash flows associated with carbon and timber (sawlog, pulp & biomass). The model highlighted uncertainties in the market values of the products and allowed them to be compared over a 33-year rotation.