Range analysis – summary of good practice

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This tutorial is drawn from Broadleaf’s long experience with project range analysis, also referred to as quantitative risk analysis or probabilistic risk analysis. It describes some key lessons about project range analysis, and what constitutes good practice. The material covers the analysis of both costs and schedules; the same principles apply to both.

Weaknesses of common project cost risk modelling methods

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A discussion of historical approaches to contingency estimation that remain embedded in current practices and the danger they represent to realistic assessment

Contingency assessment methods and trends

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Links to a webinar covering the same ground as the paper above and illustrating it with additional graphical material; unfortunately the main material is outside Broadleaf's web site and it requires PMI membership for access

The real risk to your project budget

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A discussion about structuring quantitative risk models including an explanation of why the distinction between inherent and contingent risks is unhelpful and an illustration of how risk factors can be used to link knowledge about uncertainty to calculations of uncertainty.

Linking and integrating different views of project risk

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Discussion about the relationship between qualitative risk analysis and management, generally risk register processes, and quantitative modelling or range analysis

Quantifying the risk to software project costs

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Methods used to analyse cost uncertainty in other kinds of projects are applicable to software projects. However, some of the features of software projects affect the emphasis given to various parts of the analysis, and it is useful to be clear about what these are and how we can handle them. This note outlines some of the common issues that affect uncertainty in software projects and illustrates how they can be included in an analysis.

Beta PERT origins

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An explanation of the historical reason many scheduling tools use the Beta PERT distribution, how it is used and why it has no special significance over any other distribution

Unknown unknowns

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A discussion about the concept of unknown-unknown risks, with suggestions for deliberate action that can be taken to extend the information taken into account in a risk analysis

Project cost contingency

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Project cost contingency setting is an important part of managing risk in projects. This note describes how a contingency is related to a base estimate and project risk as well as outlining how it is utilised during project execution.

Schedule uncertainty in linear developments

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Linear developments such as pipe or cable laying, road or rail building, or tunnelling, present challenges not found in other forms of construction. Analysis of the risk to their schedules may require a different approach from that used for the analysis of general construction projects. In some situations, existing schedule modelling tools lack the means to represent the particular features of linear developments. However, these can be addressed, with appropriate expertise, using two modelling tools and exchanging information between them.

Tender price risk

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Requests for tender (RFT) specify what a customer wants. They usually also define how tenders are to be laid out so that competing bids can be compared on a like-for-like basis. However, suppliers’ products and services do not always fit the framework set out in a RFT and responses might reflect a misinterpretation of requirements or a commercial ploy to offer something that is not perfectly aligned with the RFT. To understand the implications of accepting one bid as opposed to another, taking account of any misalignment between the offer and the formal requirement, it is useful to assess the actual costs that would be incurred if each tender were accepted. There is bound to be uncertainty in this assessment and it is best approached as a cost risk modelling exercise.

Simple schedule risk modelling with Safran Risk

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With a view to exploring alternative tools for quantitative project risk assessment on major engineering projects, Broadleaf reviewed Safran Risk, a tool for project planning and for modelling schedule and cost uncertainty. While Broadleaf does not endorse any specific tools, we use several in our work and discussing their application provides an opportunity to offer insights into not only the features of those tools but quantitative risk assessment and modelling in general.

Project risk modelling

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Three short videos provide an introduction to quantitative modelling of risk in projects.

Bidding to construct an electricity sub-station

Pricing, Commercial

Cost

Coal to urea plant construction bid

Pricing, Commercial, Negotiation

Cost

Cogeneration plant risk analysis

Contingency, Supplier co-ordination

Cost

Construction costs for a portfolio of buildings

Building program, Regional variations

Cost

Enhancing HV power distribution

Contingency, Joint venture

Cost

Estimating the capital cost of a new dam

Construction, Contingency

Cost

Multi billion dollar mining project cost risk assessment

Sub projects, Contingency

Cost

Target construction cost for an alliance contract

Funding, Target cost, Incentives

Cost

Delivering a new payroll system

Excel schedule, Manpower planning

Schedule

Modelling schedule uncertainty in a tunnel development

Staged development, Sub-models

Schedule

Planning review and schedule risk assessment

High level model, Analysing risk

Schedule

Ship loader upgrade

Critical plant upgrade, Shutdown

Schedule

Upgrading refineries for clean fuels

Qualitative and quantitative, Sensitivity analysis, Shutdown

Schedule

Cost and schedule risk analysis for a large resources project

Integrating cost and schedule, Workshop process

Integrated

Jansen project cost range analysis

Major capital investment, Working with schedule risk analysis

Integrated

Bidding to construct an electricity sub-station

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A contractor was preparing a commercial bid to construct a 220/110 kV electricity sub-station. This case describes a quantitative analysis conducted to estimate the effects on the project cost of events that had not been allowed for in the estimate, as an input to the commercial bid pricing decision. The case demonstrates how small-scale risk analyses that are fit-for-purpose can be used to support decisions.

Coal to urea plant construction bid

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This case illustrates a simple quantitative analysis of uncertainty, undertaken over a period of a few days. It was conducted for an engineering design and construction company to support its commercial bid for a set of work packages associated with a large coal to urea plant. It provided a sound understanding of the assumptions and uncertainties associated with the work, a basis for the commercial team to plan their negotiating approach as they finalised their formal tender response, and a valuable input to the commercial decision about the price at which to pitch the bid.

Cogeneration plant risk analysis

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A sugar refinery had initiated a project that involved upgrading equipment in the mill, refurbishing other plant at the site and installing a cogeneration plant to produce steam for use in the refinery and electricity for sale to the grid. We conducted a risk assessment to:

• Assist in identifying the threats and opportunities remaining in the project
• Expose and assist in reconciling issues arising between the suppliers of services and turnkey systems
• Evaluate the uncertainty in the estimate
• Establish a realistic capital contingency level for the project.

Construction costs for a portfolio of buildings

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A national construction company was part of a consortium bidding to deliver a large number of dwelling units at sites across Australia, and maintain them for an extended period. We worked with the contractor to develop a quantitative model of the uncertainty in the design and construction (D&C) costs for the project. The D&C model was based on a standard design and a Bill of Quantities (BoQ) that had been developed centrally. It took into account common features and common sources of uncertainty across all sites, as well as regional variations. We conducted workshops with the regional estimating teams to analyse variations in quantities and rates.

Enhancing HV power distribution

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A joint venture company was developing a new mine in a remote area. The mine and processing plant would require far more power than could be supplied through the existing high voltage (HV) transmission network. The regional HV network was to be enhanced, using a turnkey project. We conducted a quantitative risk analysis of the capital cost of the project for the power engineering contractor, to investigate and model the residual uncertainties in the cost estimate for the transmission line enhancement. We developed a model of the range of realistically likely direct cost outcomes as an input to the assessment of an agreed project contingency.

Estimating the capital cost of a new dam

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A state-owned corporation proposed to build a new water supply dam to augment existing sources. We conducted a workshop and prepared a quantitative risk model of the construction cost estimate for the new dam, to identify and quantify the sources of uncertainty in the estimate. This produced a distribution curve of the range of realistically likely construction cost outcomes, to assist in determining the confidence that could be placed in any specific cost target, budget or contingency.

Multi billion dollar mining project cost risk assessment

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The estimate for a very large mining program was being developed prior to seeking approval to proceed into detailed development. Using existing qualitative project risk assessments, we identified the major risk drivers in each of the separate projects and developed a summary estimate that matched the risk drivers. It grouped together costs subject to the same risk drivers and maintained a separation between those subject to different risk drivers.

Target construction cost for an alliance contract

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This case study concerns an alliance established to deliver a major road improvement project involving substantial civil works in addition to the road itself. The case focuses on estimating uncertainty associated with the capital cost of the project. This was needed to enable a realistic ceiling price to be set for the project for funding purposes, and to develop a target cost for the contract that would:

• Generate effective incentives for all the alliance parties
• Support an appropriate sharing of risks and rewards between them.

Delivering a new payroll system

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We reviewed the implementation program for payroll systems in a group of six related service-delivery networks. Simple Excel structures were used to model the schedule and the uncertainty associated with it. The outcomes provided a structure for activity and manpower planning, as well as a basis for liaison and coordination between the implementation company and the networks.

Modelling schedule uncertainty in a tunnel development

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Tunnelling presents challenges not found in other forms of construction. Analysis of uncertainty in tunnelling schedules may require a different approach from that used for the analysis of a process plant construction, for instance. In some situations, existing schedule modelling tools lack the means to represent particular features of tunnelling developments. However, these can be addressed, with appropriate expertise, using two modelling tools and exchanging information between them.

Planning review and schedule risk assessment

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An engineering company had been contracted to prepare a plan and an estimate for a coal handling and preparation plant. We prepared a schedule model that was consistent with the key assumptions of the master schedule and embodied the dependencies that would govern progress. The model consisted of about thirty activities representing major blocks of work. This was used to plan an intensive workshop to explore uncertainty in the activity durations and risk drivers affecting the project.

Ship loader upgrade

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A ship loader handling millions of dollars’ worth of bulk material a week was to be replaced. The owner’s team wanted to assess how much confidence they could have in the upgrade plan. We prepared a model schedule network in Primavera Risk Analysis that was aligned with the master schedule and used it to identify the major drivers and activity durations that encapsulated the uncertainty in the schedule. The analysis also indicated and revised flaws in the schedule logic.

Upgrading refineries for clean fuels

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This case illustrates the value of qualitative and quantitative risk analyses in refinery upgrades that had to be completed within the strict time constraints imposed by tight shutdown windows. Schedule impacts drove the qualitative assessment, and a quantitative analysis of uncertainty associated with the schedule was completed. Several forms of sensitivity analysis were used to highlight where additional project effort might be worthwhile.

Cost and schedule risk analysis for a large resources project

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This extended case study describes a cost and schedule risk analysis for a multi-billion dollar resources project. It illustrates:

• The development of structures for quantitative modelling of cost and schedule, incorporating drivers of uncertainty in quantities, rates and productivities
• How input data for the models can be derived in a workshop environment, to minimise the effects of important estimating biases
• How cost and schedule uncertainty can be integrated in the analysis
• Several forms of sensitivity analysis to support better understanding of the effects of uncertainty and the allocation of contingency amounts across the project

Jansen project cost range analysis

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We developed a cost risk model for Jansen’s multi billion dollar project cost estimate. We facilitated the project team evaluating uncertainty in the major cost drivers and interpreted the results to assist in decision-making about the next stages of this very large potash mine development. The cost range analysis was carried out in parallel with an in-house schedule range analysis and the schedule results were integrated into the cost model.

Quantitative analysis: about right or precisely wrong

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Quantitative analysis of uncertainty has a long history. Early work was based on relatively simple approaches that could be resolved manually or with hand calculators. Modern computing allowed calculations to be undertaken more efficiently, but the methods of analysis evolved more slowly. This presentation discussed the reasons why some quantitative models still generate gross errors and suggested ways of improving the implementation of quantitative risk analyses.

Cost and schedule risk assessment – risk factor modelling

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At the September 2014 PMI Australia conference in Melbourne, Stephen Grey spoke about common methods for evaluating project contingencies and outlined serious flaws in those that are based solely on risk events or line item ranges. He described the risk factor approach that overcomes these deficiencies making the process more realistic and less arduous. The presentation includes diagrams illustrating how the method might be applied to IT and to construction projects.

Palisade Regional Risk Conference, Sydney, 2014

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What was most noticeable about the Palisade presentations was their focus on using the tools to support decisions rather than as technical artefacts. This aligns with Broadleaf's approach to tools like this: most of the effort in solving a problem is related to understanding uncertainty and where it arises, gathering information and interpreting outcomes, with only a small proportion of time spent on modelling itself.