DavidHulett Slides

QUANTITATIVE RISK ANALYSIS
TRADITIONAL AND
NEW RISK DRIVERS APPROACH TO
SCHEDULE AND COST RISK ANALYSIS
AUGUST 7, 2008
DAVID T. HULETT, PH.D.

HULETT & ASSOCIATES, LLC
LOS ANGELES, CA USA
1
© 2008 Hulett & Associates, LLC
Introduction
• Large and complex projects need quantitative

risk analysis of cost and schedule
• Traditionally and in the PMBOK® Guide the
method has been to put “3-point estimates” on
schedule duration and cost line items. This
focuses on the impacts of risk.
• Recently we have developed an approach, the
“Risk Driver” approach, that focuses on the risks
themselves, not on the impact of risks on
durations or costs
2
Agenda
• This presentation introduces quantitative risk

analysis:
– Traditional 3-point estimate
– New Risk Driver approach
• The benefits of the new approach are discussed
and contrasted with the traditional approach
3
Introduction
USAF Approach to Schedule Risk

“A Most Probable Schedule (MPS) will be
prepared by assessing the durations presented
in the offeror’s MIPS (this means estimating the
longest, the shortest, and the most likely duration
for each task, activity, event, and milestone) and
preparing a network-based Monte Carlo
simulation in order to determine a schedule that
has a 90% probable completion date.”
Integrated Risk Management Guide,
Aeronautical Systems Center (ASC), draft, 9 April 1994
4
Overrun Risk is Not a New Issue (1)
“Initial cost and schedule estimates for major

projects have invariably been over-optimistic.
The risk that cost and schedule constraints will
not be met cannot be determined if cost and
schedule estimates are given in terms of single
points rather than distributions”
5
Overrun Risk is Not a New Issue (2)
“A formal risk analysis is putting on the table

those problems and fears which heretofore were
recognized but intentionally hidden.”
Source: “Final Report,”

US Air Force Academy
Risk Analysis Study Team 1973
6
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.”
Aviation and Space Technology, March 7, 1994, p. 32
7
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
8
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
9
Risk Analysis vs. CPM Scheduling
• Can address questions CPM cannot: The

three promises
1. What is the likelihood of meeting schedule?
2. How much schedule contingency do we need to
provide?
3. Where is there risk to the project schedule?
• Purpose is to help the project manager act
– Early warning of problems
– Location of problems for risk mitigation
10
Pitfalls in Relying on CPM
• CPM network scheduling is deterministic

• Single-point activity durations
• OK only if everything goes according to plan
But there are no “facts” about the future
• CPM durations are really probabilistic

assessments
11
Risk of an Individual Activity
• Simple activity duration estimates are risky
30d
Design Unit 1
12
Common Probability Distributions
Date: 1/13/2003 5:21:27 PM Date: 1/13/2003 5:18:35 PM

Samples: 3000 Samples: 3000
Unique ID: 3 Unique ID: 3
Name: Design Unit Name: Design Unit
0.09 1.0 0.16 1.0
0.08 0.9 0.9
0.14
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
6/21 7/3 7/15 6/21 7/2 7/15

Completion Date Completion Date
Uniform Distribution Triangular Distribution
Uniform Triangular
13
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
0.20 1.0 0.22 1.0

0.18 0.9 0.20 0.9
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
6/21 7/3 7/15 6/21 7/1 7/13

Completion Date Completion Date
Normal Distribution Beta Distribution
Normal BETA
14
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
Comparison of Probability Distributions

(20d, 30d, 45d)
Mean Standard Deviation
Uniform 33d 7.2d
Triangular 32d 5.1d
Normal 33d 4.1d
Beta 31d 3.4d
15
Risk Along a Contiguous Schedule Path
• Path risk is the combination of the risks of its

activities
Design Build Test
Test
Start Finish
Unit Unit Unit
Unit
16
Really Simple Schedule
• This schedule finishes on September 3

– 7-day weeks, like a model changeover, refinery turnaround
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
• If we can get into trouble with this simple schedule, we

can get into trouble with real project schedules
17
Add Duration Risk to the Schedule using
Triangular Distributions
ID Task Name Rept ID Min Rdur ML Rdur Max Rdur Curve

1 Project 2 0d 0d 0d 0
2 Start 0 0d 0d 0d 0
3 Design Unit 0 20 d 30 d 45 d 2
4 Build Unit 0 35 d 40 d 50 d 2
5 Test Unit 0 20 d 25 d 50 d 2
6 Finish 0 0d 0d 0d 0
Here we are showing the Data Entry Table from Risk+, a

simulation package that is a MS Project add-in
18
What is a Simulation?
• How do you find total project results? With the

durations specified as probability distributions:
– Cannot add distributions
– Must combine distributions
• Combining distributions using simulation
– Almost all possible combinations of durations
– “Perform” the project many times
19
Monte Carlo Simulation
• Monte Carlo Simulation of the schedule - 50-year old

method
– A simulation is made up of many (thousands) iterations
– Each iteration uses a new set of activity durations chosen at
random from the probability distributions
– Iteration is just a CPM analysis using those durations
– Iterate many times to reflect uncertainty in duration estimates
– Collect the data, make probability distribution of results
• CPM is not even the most likely completion date and may
not be very likely, given risks
20
Monte Carlo Simulation Results for a
Really Simple Schedule
CPM date is not even the most likely – That’s about 9/9
Date: 8/1/2006 9:37:21 AM Completion Std Deviation: 8.94 d

Samples: 5000 95% Confidence Interval: 0.25 d
Unique ID: 2 Each bar represents 3 d
Name: Project
0.14 1.0 Completion Probability Table

0.9
Risk+
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
0.6 0.15 9/4 0.65 9/17

0.08
0.5 0.20 9/6 0.70 9/18
0.06 0.4 0.25 9/7 0.75 9/20
0.3 0.30 9/8 0.80 9/21
0.04
0.35 9/9 0.85 9/23
0.2
0.02 0.40 9/11 0.90 9/26
0.1 0.45 9/12 0.95 9/29
8/19 9/14 10/15
0.50 9/13 1.00 10/15
Completion Date
One-Path Schedule
80% Target is
CPM date is <15% Likely to be met 9/21
21
Risk at Merge Points:
The “Merge Bias”
• Many parallel paths merge in a real schedule
• Finish driven by the latest converging path
• Merge Bias has been understood for 40
years
Design Unit 1 Build Unit 1 Test Unit 1
Start
Finish
Design Unit 2 Build Unit 2 Test Unit 2
22
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
Two paths are collapsed

Each path has exactly the same structure
23
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
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
8/19 9/14 10/15

Completion Date
Three Path Schedule One Path Schedule
24
Evidence of Merge Bias (continued)
Three Path Schedule One Path Schedule
25
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
26
What are the Highest Risk Activities?
• Monte Carlo simulation

– Activities on critical path in most iterations
• Path delaying the project may not be the critical
path identified by CPM
• This is “Schedule Critical” not Technically Critical
– Combination of risk and low float (slack)
27
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
“Critical” Unit 2 is Identified for Risk Mitigation

28
Risk Critical GANTT Chart
ID Task Name Total Slack Critical % Critical Risk Critica May June July August Septembe October
1 Project 0d Yes 100 Yes 100
2 Start 0d Yes 100 No 6/1
3 Unit 1 2d No 45 Yes 45
4 Design Unit 1 2d No 45 Yes 45
5 Build Unit 1 2d No 45 Yes 45
6 Test Unit 1 2d No 45 Yes 45
7 Unit 2 0d Yes 17 Yes 17
8 Design Unit 2 0d Yes 17 No 17 6/30
9 Build Unit 2 0d Yes 17 No 17 8/9
10 Test Unit 2 0d Yes 17 No 17 9/3
11 Unit 3 3d No 39 Yes 39
12 Design Unit 3 3d No 39 Yes 39
13 Build Unit 3 3d No 39 Yes 39
14 Test Unit 3 3d No 39 Yes 39
15 Finish 0d Yes 100 No 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+
29
Using the Risk Register in
Project Schedule Risk Analysis
with Monte Carlo Simulation
David T. Hulett and Waylon T. Whitehead

Hulett & Associates, LLC (USA)
2nd Annual Oil & Gas

Project Risk Management Conference
Kuala Lumpur, Malaysia
29th & 30th October, 2007
30
Agenda
• Risk Register identifies high-priority risks

• Explain “Risk Factors” approach and module in
Pertmaster
• Compute Monte Carlo simulation results
• Estimate sensitivity and net effect of key risks
• Apply Risk Factors to simple refinery schedule
• Collecting risk data for the model
• How results are used to manage project risk
31
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)
32
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
33
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
34
Simple Example of Risk Register Risks
• Use the Risk Factors module in Pertmaster Risk

Expert v. 8
• Collect probability and impact data on risks
• Load the risks
• Assign risks to schedule activities
35
Risk Factors Mechanics
• The risk factor drives the uncertainty in the

duration of activities it is assigned to
– E.g., new technology may mean that design activities’
duration is optimistically the base, most likely is +10%
and pessimistic is + 30% of the base estimate
– E.G., productivity uncertainty means duration of
construction may be -10% or +15% from our base
• The risk factor is assigned a probability of
occurring
– E.g., technology labor productivity leads to a result
different from the Plan only 50% of the time
36
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
the Plan. 35% 99
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
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
Here the 80% 119
75% 118
160
Plan is the 70% 117
140 65% 116

Optimistic
60% 115
Value. 120 55% 114

Hits
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
Assigning a Probability Less than 100%
• The essence of “risk” is the uncertainty

– Uncertainty of its occurrence, specified by a
probability
– Uncertainty of its impact, specified by a range of
durations
• If the risk may or may not occur, we specify the
probability that it will occur
– The risk “fires” and affects the activities it is assigned
to on X% of the iterations, chosen at random
– On (1 – X)% of the iterations, the plan value is used
39
Assigning a Probability less than 100%
0010 - Construction : Duration 0040 - Technology Design : Duration

100% 115 100% 130
Spike 95% 107 95% 123
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
1500
60% 100 800 60% 110
55% 100 55% 109 probability
Hits
Hits
50% 100 50% 107
45% 100 600 45% 105
1000 40% 100

40% 100
35% 100 35% 100
30% 100 400 30% 100
25% 100 25% 100
500 20% 100 20% 100
15% 100 200 15% 100
10% 99 10% 100
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)
40
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)
41
Two Risks affect One Activity
using Factors
0040 - T echnology Design : Duration

100% 144
95% 130
90% 127
140
85% 124
80% 123
120 75% 121
70% 119
Range 100
65% 118
60% 117
from 90 to 55% 116
Hits
150 days, 80 50% 115
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)
42
Two Risks with Less than 100%
Probability Affecting one Activity
0040 - T echnology Design : Duration

1100 100% 144
95% 123
The spike at 1000 90% 119
85% 116
100 days 900

80% 113
represents (1) 800

75% 111
70% 110
the likelihood 700

65% 108
60% 106
that neither risk 600 55% 104

Hits
50% 102
occurs and (2) 500 45% 101
the chance that 400

40% 100
35% 100
100 days is 300

30% 100
25% 100
picked when 200
20% 100
one or both 15% 100
10% 99
100
occur 5% 97
0 0% 91
100 110 120 130 140
43
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.
44
Simple Refinery Schedule
Software used: Pertmaster v. 8.0
45
Two Types of Risk
• Estimating Error based on the maturity of the

information, called “ambiguity”
– Used Quick Risk of -5% and +10%
• Discrete risk events derived from Risk Register
– Summarized from detailed Risk Register
– These have a probability of occurring and an impact
on specific activities if they do
– Parallel to their Risk Register information, which is
used in data collection
46
Schedule Estimating Error Only
Estimating Error: Optimistic -5% and Pessimistic +10%
47
Results with Estimating Error Only
Refinery C onstruction
E ntire P lan : Finish D ate
100% 18/A ug/14
500 95% 20/Jun/14
90% 09/Jun/14
450 85% 02/Jun/14
80% 27/May /14

Deterministic:
400
75% 21/May /14 14MAR14 is 5%
70% 15/May /14
350
65% 12/May /14
P-80: 27MAY14
60% 08/May /14
300
55% 05/May /14
Hits
50% 30/A pr/14

250
45% 25/A pr/14
40% 22/A pr/14

200
35% 18/A pr/14
30% 15/A pr/14

150
25% 10/A pr/14
100 20% 07/A pr/14
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
48
Risk Analysis on Refinery Project
Risk Register Risks using “Risk Factors”
• Seven risk factors have been identified and

quantified.
• Each Risk has 0.0 < Probability < 1.0
• Some have optimistic ranges possible, others
are pure threats
49
Results Adding
Risk Factors to the Estimating Error
Refin e ry C o n stru c tio n
E n tire P lan : F in ish D ate
100% 02/Dec /15
700 95% 09/A pr/15
90% 03/Mar/15
85% 09/Feb/15
600
80% 19/Jan/15
75% 30/Dec /14 P-80 is

500
70% 17/Dec /14
65% 02/Dec /14

19Jan15,
60% 18/Nov /14 compared to
400 55% 05/Nov /14
the schedule
Hits
50% 23/Oc t/14
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
20% 04/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
50
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
51
Risk Factor Tornado Chart
from All-In Simulation
52
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%
53
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
54
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
55
Risk Prioritization – New approach
• More complete and powerful than the standard

qualitative risk analysis using the Probability and
Impact approach
• Compute the effect of individual risks on the
cost, then sort risks by priority
• Risks are prioritized as they affect the cost
through simulating the model of the project
• Assists risk mitigation decisions
56
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
57
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.
58
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
59
Risk Driver Methodology
• Identify risks to be included from Risk Register

• Quantify risks’ probability and impact range
– The impact is a multiplicative factor
– The line item costs will be multiplied by the factors
• Assign risks to cost line items
– Risks can affect several line items
– A cost line item can be affected by several risks
• Run Monte Carlo simulation for overall cost risk
• Prioritize risks for further mitigation
60
Identify Risk Drivers
Use the Risk Register Directly
Risk Register - Model Input Data
ID Risk Name
R.1 Contracting Strategy (LSTK) may cause bidders to bid high
R.2 Design Changes may be greater than anticipated
R.3 Equipment Suppliers may be busy
R.4 Quality Key Staff JV / PMT may not be available
R.5 Number of Bidders may be limited due to availability of other work
R.6 Integration Management of detailed engineering may be inadequate
R.7 Labor Rate may differ from expectations
R.8 Construction Labor Productivity may differ from expectations
R.9 Bulk Material Cost may differ from expectations
R.10 Construction Management Staff may be lacking in experience
61
Discovery of Risk Factors
• From exploratory interviews w/ all project

stakeholders to arrive at their general ideas
about what the risks are
• From the project risk register
• From general knowledge about conditions that
might affect the project
• Risks should be independent of each other.
Related risks may be consolidated
62
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
63
Applying Risk Factors
• Cover what type of cost line items the risk factor

will apply to
• Be alert to the need for applying the same risk
factor with more than one range for different
types of costs
• Be alert to the need to divide cost lines in order
to discretely apply Risk Factors
64
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
Using @RISK from

Palisade Corporation
65
A 100% Risk Factor Applied to a
Cost Line Item of $1 million
A Cost of 1.00 million impacted

by a 100% Risk Factor
TriGen (.95, 1.05, 1.15, 10, 90)
66
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
67
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
68
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
69
Risk Factors Model How Correlation Occurs
Coefficients are Calculated (1)
Risk #1
P = 50%, Factors
.95, 1.05, 1.15
Cost Item A Cost Item B
Cost Items A and B

Correlation is
Calculated to be 100%
70
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
Cost Item A Cost Item B
Cost Items A and B

Correlation is
Calculated to be 48%
Correlation is modeled as it is caused in the project
Correlation coefficients are generated, not guessed
71
Simplified Cost Model
of a Refinery Project (1)
Refinery Construction Project Baseline Estimate (1)
Cost Category Labor Equipment Total
Direct Field Costs ($ millions)
Long Lead Equipment (LLE) 15 330 345
Equipment 30 1,200 1,230
Materials 288 1,935 2,223
Total Direct Field Costs 333 3,465 3,798
Indirect Field Costs
Supervision 360 0 360
Time-Related Overhead 315 0 315
Total Indirect Field Costs 675 0 675
Total Direct & Indirect Costs 1,008 3,465 4,473
72
Simplified Cost Model
of a Refinery Project (2)
Refinery Construction Project Baseline Estimate (2)
Labor Equipment Total
Cost Category ($ millions)

Construction Management 630 630
Material Related 180 540 720
Home Office Engineering Staff 540 540
Overhead & Fees 560
Total Contractor Related 2,358 4,005 6,923
Owner-Related
Project Management Team 450 0 450
Materials 0 400 400
Total Owner-Related 450 400 850
TOTAL BASE ESTIMATE 7,773
73
Risk Factors
Probability and Impact Ranges
Risk Drivers and their Properties
3-Point Estimate of RiskFactor

ID Name Prob.
Minimum ML Maximum
R.1 Contracting Strategy 40% 0.90 1.10 1.25
R.2 Design Changes 60% 0.95 1.05 1.20
R.3 Equipment Suppliers Busy 45% 1.00 1.05 1.30
R.4 Availability of Key Staff JV / PMT 40% 0.95 1.00 1.20
R.5 Number of Bidders 40% 0.95 1.00 1.50
R.6 Integration Management 40% 1.00 1.05 1.15
R.7 Labor Rate 50% 0.90 1.00 1.20
R.8 Construction Labor Productivity 45% 1.00 1.10 1.30
R.9 Bulk Material Cost 40% 0.90 1.05 1.20
R.10 Construction Management Staff 70% 1.00 1.05 1.15
74
Assign Risk Drivers
to Cost Elements
Cost Category Risks
Contract Design Equip. JV/PMT # of Integ. Labor Labor Bulks

Direct Field Costs Strategy Changes Supplier Staff Bidders Mgt. Rate Prod. Cost
CM Staff
Long Lead Equipment

X X X
(LLE)
Equipment X X X X
Materials X X X X
Total Direct Field Costs
Direct & Indirect Labor
X X X
Costs
Construction
X
Management
Material Related X X
Home Office
X X X
Engineering Staff
Overhead & Fees X x
Owner-Related
Project Management
X
Team
Materials X
75
Cost Risk Analysis Results (1)
Most Likely cost is

about $8 billion
76
Base Cost is 9.3%
likely
80th percentile is
$9.53 million for a
$1.76 million (23%)
Contingency
Reserve
77
Percentile $ mill. %
10% 7,793 0%
20% 7,999 3%
30% 8,183 5%
40% 8,383 8%
50% 8,611 11%
60% 8,866 14%
70% 9,168 18%
80% 9,529 23%
90% 10,118 30%
78
Risk Sensitivity –
Beginning of Risk Prioritization
These are Risks, not

cost line items
79
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%
These risks are prioritized as if they could be completely mitigated. That is

not possible, but it indicates the priority for risk mitigation actions.
80
Partial Risk Mitigation (1)
• The number of bidders in today’s heated oil and
gas building environment is problematic and
deemed as an important cost risk driver
• With few bidders we expect contractors to feel
freer to include high levels of risk premium and
profit into their bids
• A similar observation can be made about
procurement prices for equipment suppliers that
are busy
81
Partial Risk Mitigation (2)
•Suppose that we were willing to allow bidders to

form Joint Ventures or funding their bidding
expenses?. What could happen?
3-Point Estimate of RiskFactor

Prob.
Example of Risk Mitigation Minimum ML Maximum
Before Risk Mitigation
Number of Bidders 40% 0.95 1.00 1.50
After Risk Mitigation
Number of Bidders 20% 0.90 1.00 1.25
82
Risk after Mitigating
Number of Bidders Risk
83
Number of Bidders is Now
Lower on the Priority List
84
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
Partially mitigating Number of Bidders Risk

improves the risk at the P-80 level
85
Summary – Quantitative Risk Analysis Results
and Risk Prioritization using Risk Drivers
• Project risks are characterized by their:
– Probability of occurring
– Impact range as a multiplicative factor
– Cost line items they impact if they occur
• Monte Carlo simulation develops:
– Probability of achieving the cost target (without
contingency)
– Contingency reserve of cost needed to satisfy the
organization’s appetite for risk
• Risks can be taken out of the simulation one at a
time and their marginal impact (through the cost
model) calibrated:
– Risk prioritization is based on this analysis
– Partial risk mitigation can be studied for benefit/cost
analysis
86
QUANTITATIVE RISK ANALYSIS
TRADITIONAL AND
NEW RISK DRIVERS APPROACH TO
SCHEDULE AND COST RISK ANALYSIS
AUGUST 7, 2008
DAVID T. HULETT, PH.D.

HULETT & ASSOCIATES, LLC
LOS ANGELES, CA USA
87

DavidHulett Slides

Încărcat de

Informații document

Descriere originală:

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

DavidHulett Slides

Încărcat de

Drepturi de autor:

Formate disponibile

QUANTITATIVE RISK ANALYSIS

DAVID T. HULETT, PH.D.

• Large and complex projects need quantitative

• This presentation introduces quantitative risk

USAF Approach to Schedule Risk

“Initial cost and schedule estimates for major

“A formal risk analysis is putting on the table

Source: “Final Report,”

Aviation and Space Technology, March 7, 1994, p. 32

• Can address questions CPM cannot: The

• CPM network scheduling is deterministic

• CPM durations are really probabilistic

• Simple activity duration estimates are risky

Date: 1/13/2003 5:21:27 PM Date: 1/13/2003 5:18:35 PM

6/21 7/3 7/15 6/21 7/2 7/15

0.20 1.0 0.22 1.0

6/21 7/3 7/15 6/21 7/1 7/13

Comparison of Probability Distributions

• Path risk is the combination of the risks of its

• This schedule finishes on September 3

• If we can get into trouble with this simple schedule, we

ID Task Name Rept ID Min Rdur ML Rdur Max Rdur Curve

Here we are showing the Data Entry Table from Risk+, a

• How do you find total project results? With the

• Monte Carlo Simulation of the schedule - 50-year old

Date: 8/1/2006 9:37:21 AM Completion Std Deviation: 8.94 d

0.14 1.0 Completion Probability Table

0.6 0.15 9/4 0.65 9/17

Design Unit 1 Build Unit 1 Test Unit 1

Two paths are collapsed

8/19 9/14 10/15

Three Path Schedule One Path Schedule

Three Path Schedule One Path Schedule

• Monte Carlo simulation

“Critical” Unit 2 is Identified for Risk Mitigation

David T. Hulett and Waylon T. Whitehead

2nd Annual Oil & Gas

• Risk Register identifies high-priority risks

• Use the Risk Factors module in Pertmaster Risk

• The risk factor drives the uncertainty in the

the Plan. 35% 99

Here the 80% 119

Plan is the 70% 117

140 65% 116

Value. 120 55% 114

• The essence of “risk” is the uncertainty

0010 - Construction : Duration 0040 - Technology Design : Duration

Spike 95% 107 95% 123

55% 100 55% 109 probability

50% 100 50% 107

45% 100 600 45% 105

1000 40% 100

35% 100 35% 100

30% 100 400 30% 100

25% 100 25% 100

500 20% 100 20% 100

15% 100 200 15% 100

10% 99 10% 100

0040 - T echnology Design : Duration

120 75% 121

150 days, 80 50% 115

0040 - T echnology Design : Duration