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TRADITIONAL AND
NEW RISK DRIVERS APPROACH TO
SCHEDULE AND COST RISK ANALYSIS
AUGUST 7, 2008
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© 2008 Hulett & Associates, LLC
Introduction
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Introduction
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© 2008 Hulett & Associates, LLC
Overrun Risk is Not a New Issue (1)
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Overrun Risk is Not a New Issue (2)
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Schedule Risk Is Common,
It’s Not just in Aerospace Projects
“The opening of Denver International Airport, originally
scheduled for last October (1993), has been delayed
yet again, this time until May 15 (1994) because of
problems in troubleshooting its complex baggage
system… The delay will cost the city, and United and
Continental airlines a total of $30 million.”
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© 2008 Hulett & Associates, LLC
Some Reasons for Schedule Risk
• Fundamental uncertainty in the work
• Unrealistic baseline schedule
• Natural, geological causes
• Project complexity
• Scheduling abuses
• Relying on participants outside the organization
• Subcontractor late
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© 2008 Hulett & Associates, LLC
Some Reasons for Schedule Risk
(continued)
• Design changes
• Staffing Manufacturing problems
• Contracting problems
• Customer (government) not supportive
• Cannot get subcontractor under contract
William Cashman, “Why Schedules Slip…”
Air Force Institute of Technology (AFIT) Master’s Thesis, 1995
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Risk Analysis vs. CPM Scheduling
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Pitfalls in Relying on CPM
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Risk of an Individual Activity
30d
Design Unit 1
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Common Probability Distributions
Cumulative Probability
Cumulative Probability
0.07 0.8 0.8
0.12
0.7 0.7
0.06
Frequency
Frequency
0.6 0.10 0.6
0.05
0.5 0.08 0.5
0.04
0.4 0.06 0.4
0.03 0.3 0.3
0.02 0.04
0.2 0.2
0.01 0.1 0.02 0.1
Uniform Triangular
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© 2008 Hulett & Associates, LLC
Common Probability Distributions
(continued)
Date: 7/10/2002 3:19:37 PM Date: 7/10/2002 3:20:30 PM
Samples: 3000 Samples: 3000
Unique ID: 3 Unique ID: 3
Name: Design Unit Name: Design Unit
Cumulative Probability
Cumulative Probability
0.16 0.8 0.17 0.8
0.14 0.7 0.7
Frequency
Frequency
0.15
0.12 0.6 0.6
0.13
0.10 0.5 0.5
0.10
0.08 0.4 0.4
0.3 0.08 0.3
0.06
0.04 0.2 0.05 0.2
0.02 0.1 0.03 0.1
Normal BETA
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Comparison of Four Distributions
• The three distributions have different characteristics
• The uniform expresses most risk (mean, Standard deviation)
• Triangular is fairly conservative
• The Beta is the least risky
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Risk Along a Contiguous Schedule Path
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Really Simple Schedule
ID Task Name Duratio Start Finish May June July August SeptemOctober
1 Project 95 d 6/1 9/3
2 Start 0d 6/1 6/1 6/1
3 Design Unit 30 d 6/1 6/30 6/1 6/30
4 Build Unit 40 d 7/1 8/9 7/1 8/9
5 Test Unit 25 d 8/10 9/3 8/10 9/3
6 Finish 0d 9/3 9/3 9/3
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Add Duration Risk to the Schedule using
Triangular Distributions
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What is a Simulation?
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Monte Carlo Simulation
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Monte Carlo Simulation Results for a
Really Simple Schedule
CPM date is not even the most likely – That’s about 9/9
Cumulative Probability
0.12
0.8
Prob Date Prob Date software
0.05 8/31 0.55 9/14
0.10 0.7 0.10 9/2 0.60 9/15
Frequency
Start
Finish
Design Unit 2 Build Unit 2 Test Unit 2
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© 2008 Hulett & Associates, LLC
This Schedule has
Three Parallel Paths
ID Task Name Rept ID Min Rdur ML Rdur Max Rdur Curve May June July August Septemb
1 Project 2 0d 0d 0d 0
2 Start 0 0d 0d 0d 0 6/1
3 Unit 1 1 0d 0d 0d 0
4 Design Unit 0 20 d 30 d 45 d 2 6/1 6/30
5 Build Unit 1 0 35 d 40 d 50 d 2 7/1 8/9
6 Test Unit 1 0 20 d 25 d 50 d 2 8/10 9/3
7 Unit 2 1 0d 0d 0d 0
11 Unit 3 1 0d 0d 0d 0
15 Finish 0 0d 0d 0d 0 9/3
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© 2008 Hulett & Associates, LLC
Evidence of the Merge Bias
Date: 8/1/2006 9:37:21 AM
Samples: 5000
Unique ID: 2
Name: Project
0.14 1.0
0.9
Cumulative Probability
0.12
0.8
0.10 0.7
Frequency
0.6
0.08
0.5
0.06 0.4
0.04 0.3
0.2
0.02
0.1
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Evidence of Merge Bias (continued)
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Graphical Evidence of the Merge Bias
Merge Bias
100%
90%
80%
70%
Cum. Prob.
60%
One Path
50%
Three Path
40%
30% Merge Bias
20%
10%
0%
8/11 8/21 8/31 9/10 9/20 9/30 10/10 10/20
Date
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What are the Highest Risk Activities?
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What are the Highest-Risk
Activities?
Units 1 & 3 are Shorter and Not Risk Mitigated
ID Task Name Duration Start Finish May June July August September October
1 Project 95 d 6/1 9/3
2 Start 0d 6/1 6/1 6/1
3 Unit 1 93 d 6/1 9/1
4 Design Unit 1 28 d 6/1 6/28 6/28
5 Build Unit 1 40 d 6/29 8/7 8/7
6 Test Unit 1 25 d 8/8 9/1 9/1
7 Unit 2 95 d 6/1 9/3
8 Design Unit 2 30 d 6/1 6/30 6/30
9 Build Unit 2 40 d 7/1 8/9 8/9
10 Test Unit 2 25 d 8/10 9/3 9/3
11 Unit 3 92 d 6/1 8/31
12 Design Unit 3 30 d 6/1 6/30 6/30
13 Build Unit 3 37 d 7/1 8/6 8/6
14 Test Unit 3 25 d 8/7 8/31 8/31
15 Finish 0d 9/3 9/3 9/3
The “Critical Path” has been managed and is only 17% likely to delay the
project. Now we should mitigate risk in Units 1 & 3
The Risk GANTT chart in Risk+
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Using the Risk Register in
Project Schedule Risk Analysis
with Monte Carlo Simulation
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Agenda
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© 2008 Hulett & Associates, LLC
Driving Risk Quantitative Schedule
Risk by Register Risks
• Typical schedule risk analysis starts with the
activity that is impacted by risks
– Estimates the 3-point estimate for optimistic, most
likely and pessimistic duration
– Creates a probability distribution for activity duration
– Performs Monte Carlo simulation
• Which activities have the most overall schedule
risk? These questions are typically answered by:
– Sensitivity
– Criticality
– Cruciality (combination of both)
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© 2008 Hulett & Associates, LLC
Some Problems with Traditional
Approach
• Can tell which activities are crucial, but not
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 with risk mitigation
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© 2008 Hulett & Associates, LLC
We Propose a Risk Driver Approach:
Focus on Risks, not Activity Durations
• Drive the schedule risk by the risks already analyzed
in the Risk Register
• For each risk, specify:
– Probability it will occur
– Impact on time if it does
– Activities it will affect
• Starting with the risks themselves gives us benefits
– Links qualitative analysis to the quantitative analysis
– Estimates the impact of specific risks for prioritized
mitigation purposes
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Simple Example of Risk Register Risks
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Risk Factors Mechanics
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Risk Factor
Applied to a 100 day Task (1)
0 0 1 0 - C o n s tr u c tio n : D u r a tio n
1 0 0% 11 5
2 50
9 5 % 1 11
9 0 % 1 09
8 5 % 1 08
Here the 2 00
8 0 % 1 06
7 5 % 1 05
Ranges are 7 0 % 1 04
6 5 % 1 04
based on
Cumulative Frequency
6 0 % 1 03
1 50
deviations + 5 5 % 1 02
Hits
5 0 % 1 01
and – from 4 5 % 1 01
4 0 % 1 00
1 00
30% 99
Probability 25% 98
is 100% 50 20% 97
15% 96
10% 95
5 % 94
0 0 % 90
90 95 10 0 1 05 1 10 11 5
D istrib u tio n (sta rt o f in te rva l)
Base Duration 37
© 2008 Hulett & Associates, LLC
Risk Factor
Applied to a 100-day Task (2)
0 0 4 0 - T e c h n o lo g y D e s ig n : D u r a tio n
100% 130
95% 125
200
90% 122
85% 121
180
75% 118
160
Cumulative Frequency
60% 115
50% 113
Probability 100
45% 112
is 100% 80
40% 111
35% 110
30% 109
60
25% 109
20% 108
40
15% 107
20 10% 105
5% 104
0 0% 100
100 110 120 130
D istrib u tio n (sta rt o f in te rv a l)
Base Duration 38
© 2008 Hulett & Associates, LLC
Assigning a Probability Less than 100%
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Assigning a Probability less than 100%
contains
90% 103 1200 90% 120 Spike
85% 101 85% 118
70% of
2000
80% 100 80% 116 contains
the
75% 100
70% 100
1000 75% 114
70% 113
40% of
probability
65% 100 65% 111
the
Cumulative Frequency
Cumulative Frequency
1500
60% 100 800 60% 110
Hits
Hits
5% 97 5% 100
0 0% 100
0 0% 91
100 110 120 130
95 100 105 110 115
Distribution (start of interval) Distribution (start of interval)
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© 2008 Hulett & Associates, LLC
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 resulting risk has ranges of, approximately:
• Optimistic: 90% (.9 x 1.0)
• Most Likely:110% (1.0 x 1.1)
• Pessimistic:150% (1.15 x 1.3)
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© 2008 Hulett & Associates, LLC
Two Risks affect One Activity
using Factors
95% 130
90% 127
140
85% 124
80% 123
70% 119
Range 100
65% 118
Cumulative Frequency
60% 117
from 90 to 55% 116
Hits
45% 114
Peak about 60
40% 113
35% 111
113 days 30% 110
40 25% 109
20% 108
15% 106
20
10% 104
5% 102
0 0% 93
100 110 120 130 140
Distribution (sta rt of inte rva l)
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© 2008 Hulett & Associates, LLC
Two Risks with Less than 100%
Probability Affecting one Activity
95% 123
85% 116
70% 110
Cumulative Frequency
60% 106
50% 102
occurs and (2) 500 45% 101
35% 100
25% 100
picked when 200
20% 100
10% 99
100
occur 5% 97
0 0% 91
100 110 120 130 140
Distribution (sta rt of inte rva l)
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© 2008 Hulett & Associates, LLC
Sensitivity to the Risk Factors, NOT to the
Activity Durations that are Affected
Risk #1 has
larger
percentage
extremes but
Risk #2 has
a higher
probability.
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© 2008 Hulett & Associates, LLC
Simple Refinery Schedule
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Two Types of Risk
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Schedule Estimating Error Only
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© 2008 Hulett & Associates, LLC
Results with Estimating Error Only
Refinery C onstruction
E ntire P lan : Finish D ate
100% 18/A ug/14
90% 09/Jun/14
450 85% 02/Jun/14
Cumulative Frequency
60% 08/May /14
300
55% 05/May /14
Hits
15% 31/Mar/14
50 10% 24/Mar/14
5% 14/Mar/14
0 0% 24/Jan/14
27/Feb/14 18/A pr/14 07/Jun/14 27/Jul/14
Distribution (sta rt of inte rva l)
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© 2008 Hulett & Associates, LLC
Risk Analysis on Refinery Project
Risk Register Risks using “Risk Factors”
90% 03/Mar/15
85% 09/Feb/15
600
80% 19/Jan/15
Cumulative Frequency
60% 18/Nov /14 compared to
400 55% 05/Nov /14
the schedule
Hits
300
45% 10/Oc t/14
of 14MAR14
40% 30/Sep/14
35% 16/Sep/14
30% 02/Sep/14
200
25% 20/A ug/14
15% 15/Jul/14
100
10% 20/Jun/14
5% 16/May /14
0 0% 11/Feb/14
18/A pr/14 04/Nov /14 23/May /15 09/Dec /15
Distribution (sta rt of inte rva l)
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© 2008 Hulett & Associates, LLC
Results from the Simulation
Summary Results from the Factors Risk Analysis
Base Schedule
Percentile Date P-5 P-95 Months
Deterministic 14-Mar-14 N/A
Background Risks Only
P-80 27-May-14 14-Mar-14 20-Jun-14 3.2
Contingency Months 2.4
All Background and Risk Register Risks
P-80 19-Jan-15 16-May-14 9-Apr-15 10.8
Contingency Months 10.2
The all-in risk results show a wide range of 10.8 months and a contingency of
10.2 months or 15% in terms of calendar days on a 69-month project
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Risk Factor Tornado Chart
from All-In Simulation
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Contribution of Each Risk to the
Contingency in Order of Mitigation Priority
Priority Risks to Mitigate, Contribution to Savings
P-80 Savings from Total Mitigation
All Risks In Date 19-Jan-15 Days Saved Percent of Total
Specific Risks, Taken Out in Best Order (differs from the Tornado Chart)
LLE Supplier Risk 11-Nov-14 69 22%
Construction Supervision Risk 26-Sep-14 46 15%
Suppliers Busy Risk 22-Jul-14 66 21%
Construction Logistics Risk 1-Jul-14 21 7%
Financing Risk 17-Jun-14 14 5%
Vendor Rep Risk 5-Jun-14 12 4%
Design Productivity Risk 27-May-14 9 3%
Background Risk 14-Mar-14 74 24%
Total Contingency Days 14-MAR-14 to 19-JAN-15 311 100%
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© 2008 Hulett & Associates, LLC
Project Cost Risk Analysis:
The Risk Driver Approach
Prioritizing Project Risks
and Evaluating Risk Responses
David T. Hulett, Ph.D.
Keith Hornbacher, MBA
Waylon T. Whitehead
Hulett & Associates, LLC
Los Angeles, CA USA
www.projectrisk.com
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© 2008 Hulett & Associates, LLC
Outline
• Some limitations of the traditional 3-point
estimate quantitative risk analysis
• Introducing the Risk Driver Method to cost risk
analysis
– Method illustrated
– Data collection considerations
– Some benefits of the Risk Driver approach
– Simple refinery construction example
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Risk Prioritization – New approach
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Benefits of the
Risk Driver Approach (1)
• Focus on the risks, not their impact on line item
costs
• Provide management with prioritized list of risks,
not activities, that need mitigation
• Interviews are conducted at the level of risk
where people think of risk, not line items. They
are more intuitive for all parties and simpler to
verify and validate
• Interviews are generally shorter than when using
traditional 3-point estimating
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© 2008 Hulett & Associates, LLC
Benefits of the
Risk Driver Approach (2)
• Correlations occur often in cost risk
– If steel prices increase, the prices for structural steel,
pipe and vessels will increase together
– If labor productivity declines, direct and indirect labor
will cost more, together
• Traditionally we have to estimate correlation
coefficients – not easy because data are not
available and the concept is not familiar to most
people
• Risk Driver method models how correlations
come about due to risks affecting more than one
line item. No more guessing at correlation
coefficients.
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© 2008 Hulett & Associates, LLC
Introducing the
Risk Driver Method
• Start with the Risk Register risks – the linkage to
the qualitative risk analysis exercise is obvious
and direct
• Characterize the risks by their probability as well
as impact, not just impact range as traditional
analysis
• Probability and impact are the TWO dimensions
of a risk
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Risk Driver Methodology
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Discovery of Risk Factors
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Detailed Interviews for
Information about Risk Factors
• Using the arrived at Risks, conduct interviews to
assess their likelihood and impact
• Be alert to the discussion of new risks during the
interviews
• The use of pre-read information can assist with
the amount of information that can be covered in
a time limited interview
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© 2008 Hulett & Associates, LLC
Applying Risk Factors
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© 2008 Hulett & Associates, LLC
Use Trigen Function to Correct for Narrow
Ranges from Interviews
Design Changes
3-point estimate is
.95, 1.05, 1.15
Trigen makes it
.87, 1.05, 1.23
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© 2008 Hulett & Associates, LLC
A 100% Risk Factor Applied to a
Cost Line Item of $1 million
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A 40% Risk Factor Applied to
Cost Line Item of $1 million
A Cost of 1.00 million impacted
by a 40% Risk Factor Trigen
(.95, 1.05, 1.15, 10, 90)
The spike has 60% of the
probability, indicating that the
risk occurs only in 40% of the
iterations
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© 2008 Hulett & Associates, LLC
A Cost of $1.0 million
Affected by Two 100% Risk Drivers
Affected by Two 100%
Trigen (10,90) Risks
(1) .95, 1.05. 1.15
(2) .90, 1.00, 1.05
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© 2008 Hulett & Associates, LLC
A Cost of $1.0 million
Affected by Two 50% Risk Drivers
Affected by Two 50%
Trigen (10,90) Risks
(1) .95, 1.05. 1.15
(2) .90, 1.00, 1.05
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© 2008 Hulett & Associates, LLC
Risk Factors Model How Correlation Occurs
Coefficients are Calculated (1)
Risk #1
P = 50%, Factors
.95, 1.05, 1.15
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Risk Factors Model How Correlation Occurs
Coefficients are Calculated (2)
Risk #2 Risk #1 Risk #3
P = 25%, Factors P = 50%, Factors P = 45%, Factors
.8, .95, 1.05 .95, 1.05, 1.15 1.0, 1.1, 1.2
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Simplified Cost Model
of a Refinery Project (2)
Refinery Construction Project Baseline Estimate (2)
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Risk Factors
Probability and Impact Ranges
Risk Drivers and their Properties
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Assign Risk Drivers
to Cost Elements
Cost Category Risks
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Cost Risk Analysis Results (2)
Base Cost is 9.3%
likely
80th percentile is
$9.53 million for a
$1.76 million (23%)
Contingency
Reserve
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© 2008 Hulett & Associates, LLC
Cost Risk Analysis Results (3)
Percentile $ mill. %
10% 7,793 0%
20% 7,999 3%
30% 8,183 5%
40% 8,383 8%
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Risk Sensitivity –
Beginning of Risk Prioritization
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Risk Drivers Listed in Priority Order
All Risks Included 9.53
Improvement if Mitigated
Risks $ Bill. % Savings
Number of Bidders 0.42 4%
Equipment Suppliers Busy 0.41 4%
Contracting Strategy 0.30 3%
Design Changes 0.14 1%
Bulk Material Cost 0.12 1%
Construction Labor Productivity 0.10 1%
Availability of Key Staff JV / PMT 0.07 1%
Labor Rate 0.04 0%
Construction Management Staff 0.02 0%
Integration Management 0.01 0%
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© 2008 Hulett & Associates, LLC
Partial Risk Mitigation (2)
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Risk after Mitigating
Number of Bidders Risk
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Number of Bidders is Now
Lower on the Priority List
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Impact of Partially Mitigating the Number of
Bidders Risk
No Mitigation Partial Mitigation
Percentile
$ mill.
10% 7,793 7,746
20% 7,999 7,920
30% 8,183 8,083
40% 8,383 8,248
50% 8,611 8,424
60% 8,866 8,633
70% 9,168 8,869
80% 9,529 9,185
90% 10,118 9,637
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© 2008 Hulett & Associates, LLC
QUANTITATIVE RISK ANALYSIS
TRADITIONAL AND
NEW RISK DRIVERS APPROACH TO
SCHEDULE AND COST RISK ANALYSIS
AUGUST 7, 2008
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© 2008 Hulett & Associates, LLC