Risk Modelling of a Notional Mega

Project Cost Estimate 11 Nov 2011

 Overview

Mega Projects by their very nature consist of smaller individual projects that integrate
together to form a whole.

In a similar fashion the estimate for such a project also comes from a multitude of diverse
disciplines with differing sources and work practices.

This paper will use a case study to show how a risk model for the Cost Estimate was built
in Palisade @Risk to identify appropriate levels of Contingency and Management
Reserve.

Inputs to the model were taken from a variety of sources including

Control Estimate
Systemic risk models
Quantitative schedule risk models
Risk ranging workshops
Various risk registers

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 Contingency & Management Reserve

Contingency
Contingency is the amount of money used in the estimate to deal with the uncertainties
inherent in the estimating process. Contingency is required because estimating is not
an exact science.
The amount of infill and concrete to cover an underground pipe, the number of man-
hours to complete the task, and the actual all in labour rate, are all best estimates until
the work is complete

Management Reserve
An amount added to the estimate to allow for specific risks that may or may not occur
that are within the projects control or influence. Risk is defined as an undesirable
potential outcome and its probability of occurrence
Does not include force majeure, currency risk, political risk etc

Scope
Both amounts are based on a defined scope. Should scope change , the estimate must
be revised to reflect such changes in scope.
Neither Contingency nor Management Reserve are a source of funds to cover scope
changes

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4
 Mega Project vs Project Portfolio

Key Differences
So why is a Mega Project so different to a Portfolio of Projects being executed by a
Company.
Key differences are:
Same key personnel
Mega project is a number of inter related projects with numerous key interfaces. Any
delay or changes to one can have a significant effect on one or the others
Site Wide Services common to all sub projects
Same geographical location

Effect
Must not underplay the significance of these differences. Sub projects must not be
modeled in isolation
Liberal use of correlation between sub projects to avoid nodal bias
Schedule must be modeled at the mega project level ensuring all interfaces are
included.

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 Identifying the Risks

The Risk Register

Prior to estimating contingency or otherwise quantifying risk impacts, the risks must first
be identified and then logged in the Risk register. Husky uses a standard 5 x 5 risk
Matrix as a Probability Impact Diagram for Project Risk. Impacts are defined specific
to project

Likelihood of Occurrence
Consequence Very Low Low Medium High Very High
Very High 5A 5B 5C 5D 5E
High 4A 4B 4C 4D 4E
Medium 3A 3B 3C 3D 3E
Low 2A 2B 2C 2D 2E
Very Low 1A 1B 1C 1D 1E

Priority Action Setting

Critical Immediate Action must be taken to Prevent or Mitigate the
Risk
Serious Mitigation Action Required
Moderate Mitigation Strategies to be investigated
Acceptable Be aware of Potential Mitigation Strategies

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Typical Risk Register

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Typical Boston Square

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 The Cost Model
Main input to the Cost Model was the Control Estimate. However elements of the
estimate were modelled using a variety of techniques and then brought into an
overall Cost Risk model

Risk ranging workshops using range estimating techniques

Systemic risk modelling
Quantitative schedule risk models
Specific risk modelling

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Traditional Probability Distribution Functions

@Risk contains a wealth of distribution functions.

Most are useful to the in depth simulation requiring sophisticated tools.
Only a few are suitable for general cost modelling 10
 Typical Probability Distribution Functions

Risk Uniform
Used when we have no idea what the
value is between two limits

Risk Triangle
Most Popular distribution to show
Most Likely value tapering to a Min
and Max Fundamental
Flaw of Triangle
and Trigen is
when the
Risk Trigen
distribution is
Modification of Triangle
skewed
Allows for a finite probability of
achieving Min & Max Values

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Most Likely =5, Min =4, Max =15
Most Likely = 5
Mean = 8
P50= 7.58

Most Likely = 5
Mean = 6.5
P50= 6.16

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 AACE International Recommended Practice No. 41R-08

RISK ANALYSIS AND CONTINGENCY DETERMINATION USING RANGE ESTIMATING

Monte Carlo software for risk analysis requires identification of a probability density
function (PDF) for each critical item. In rare instances the behavior of a critical item is
known to conform to a specific type of PDF such as a lognormal or beta distribution,
which reflects items that may skew heavily to one side of a distribution. However in
most instances it is unlikely that the actual type of PDF that truly represents the item is
known. Thus a reasonable approximation is to use either

- Triangular Distribution

- Double Triangular Distribution

In most cases, the double triangular distribution is a better approximation since it can be
made to conform to the implicit skew of the project teams probability assessment. The
double triangle allows the risk analyst to use the probabilities which the project team
believes are reasonable rather than letting the triangular distribution dictate a probability
which, more often than not, is invalid.

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Double Triangle Method

Probability Density
Area = Underrun Probability

Area = Overrun Probability

a c Random Variable x b

Most Likely = 5
Mean = 6.5
P50= 5.0

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Double Triangle Method
F1

Probability Density
F2

Urun 1-Urun

Min ML Max

Min Max Urun F1 F2 RF

-10% 20% 30% 6 7 1.00

F1= 2*Urun/Min
F2= 2*(1-Urun)/Max
RF=1+RiskGeneral(Min,Max,{0,0},F1:F2,RiskStatic(0))
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 Schedule Risk

Quantitative Schedule Risk Analysis

Husky uses Primavera P6 to schedule all
projects greater than $5MM. Oracle
Primavera Risk, formerly known as
Pertmaster, is used for quantitative
schedule risk analysis (QSRA)
To bring in the cost element of schedule
delay, the results of the QSRA were
brought into the cost model as a set of
percentiles days delay from P0 to
P100.
Use of the @Risk Fit Manager was used
to fit the best curve to this profile, with
options set to update the curve each
simulation. This simplified the update
process each time the schedule
model changed.
The schedule @Risk function was then
multiplied by another @Risk function
that represented the uncertainty in
cost per day to give an effective cost
for schedule slippage
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 Schedule Cost Risk
27/06/2013

0% 25-Feb-13 -122
5% 07-May-13 -51
10% 23-May-13 -35
15% 04-Jun-13 -23
20% 13-Jun-13 -14
25% 21-Jun-13 -6
30% 28-Jun-13 1
35% 05-Jul-13 8
40% 11-Jul-13 14
45% 17-Jul-13 20
50% 22-Jul-13 25
55% 28-Jul-13 31
60% 02-Aug-13 36
65% 09-Aug-13 43
70% 16-Aug-13 50
75% 23-Aug-13 57
80% 01-Sep-13 66
85% 11-Sep-13 76
90% 24-Sep-13 89
95% 12-Oct-13 107
100% 24-Dec-13 180

=RiskLoglogistic(-1063,1088.2,38.361, RiskFit("Schedule","RMSErr"),
RiskName("Schedule"), RiskStatic(0))
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 Use of a Systemic Risk tool

Systemic Risk
Systemic risk drivers such as the level of project scope definition affect
individual, disaggregated estimate line items in a way that is hard to see and
predict.
Best practice is to address systemic risk drivers using empirical knowledge
(from historical data) to produce stochastic models that link known risk
drivers (e.g. scope definition) to bottom line project cost growth.
It was decided that this approach would be best suited for the Process Plant,
which formed the major part of the cost estimate.
Conquest Consulting Group , who have wide experience in the use of such
tools, were engaged to construct a parametric model which used a series of
questionnaires to the project team based on :
- Contractor Organisation
- Contractor Experience
- Project Planning
- Execution Strategy
- Scope Definition
Fit Manager was again used to integrate the results from the parametric
model into the overall model
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 Systemic Risk Questionnaire
Case Description: SNAM
Date: 9/30/2010 & 10/22/2010
2 Enter Contractor Bid Value 1,079,000 ($ thousands) Currency Canadian$
Enter Execution Schedule Bid Duration 39.8 (months)

3 BID MATURITY WORKSHEET

Ratings: 0=N/A, 1=Greatly Exceeds, 2 = Exceeds, 3 = Meets, 4 = Does Not Meet, 5 = Fails (EXPECTATIONS) Rating
Contractor Organization Evaluation
Overall Contractor Capabilities 3
Meets expectations with regard to overall capabilities (including financial strength, reputation, experience, resources, etc.).

added note:
Contractor Organizational Structure 3
Meets expectations with regard to the proposed organization structure to support the project.

added note:
Alignment of JV Partners 3
Meets expectations with regard to clear and documented alignment of JV Partners.

added note:
Key Project Personnel Proposed 4
Does not meet expectations with regard to the key personnel proposed for the project (years of experience, applicable experience, guarantee of
staying with the project, etc.)
added note:
Contractor Ramp-up Strategy and Capability 3
Meets expectations with regard to the proposed ramp-up strategy and capability to adequately resource the project in a timely fashion.

added note:
Contractor Resource Capability and Availability 4
Does not meet expectations with regard to resource capabilities and availability (such as number of in-house resources and capability to contract
resources).
added note:
Alignment with Subcontractors and Suppliers 3
Meets expectations with regard to alignment of the contractor with sub-contractors and suppliers.

added note:
Contractor Organization Evaluation 3.3 19
 Specific Risk Input

Probability and Impact

Specific Risks consist of both a probability of occurrence, and an impact should they
occur
Risk Probability modeled as simple binomial to simulate Yes/No
Risk Impact modeled as a PDF to give uncertainty of the impact
Risk outcome modeled as a product of Probability (0 or 1) and Impact

Problems
Prior to release of @Risk 5.0 there were inherent problems using this method in that
Tornado Diagram showed both Probability and Impact as two separate risk inputs

RiskMakeInput
@Risk5.0 onwards allowed for use of RiskMakeInput to combine the two together.
Use extract from Risk Register to directly map risks into the model
RiskID Description Score Prob Min $ Max $ Risk amount $
FFH-013 Construction in advance of sufficient engineering A3 5% 2,000,000 3,500,000 0

Risk Amount = RiskMakeInput( (RiskBinomial(1, Prob,RiskStatic(0))*

RiskUniform( Min,Max)),RiskName(Description))

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 Risk Results

Summary Results
Individual Risk models were established on separate MSExcel sheets and outputs
summarised on tabular results sheet
Extensive use made of the @Risk function RiskPercentile to provide tabular output that
could be copied and pasted direct into reports

$MM Estimate Risked Value 50% 70% 90% P50 P70 P90
Process Plant $918.3 $918.3 $1,038.2 $1,107.7 $1,209.4 13.1% 20.6% 31.7%
SubSurface Development $1.6 $1.6 $1.8 $2.0 $2.3 16.4% 27.2% 42.9%
Drilling & Completions $193.8 $193.8 $208.4 $217.0 $229.3 7.6% 12.0% 18.3%
Infrastructure $124.4 $124.4 $133.4 $137.4 $143.3 7.2% 10.4% 15.2%
Midstream $30.2 $30.2 $33.2 $34.6 $36.6 9.9% 14.6% 21.2%
Business & System Management $11.3 $11.3 $12.8 $13.2 $13.9 13.2% 16.8% 22.7%
Ow ners Costs $156.6 $156.6 $171.7 $176.4 $183.2 9.6% 12.6% 17.0%
Additional Specific Risk $.0 $.0 $22.3 $28.2 $38.1
TOTAL PROGRAM $1,436.2 $1,436.2 $1,623.6 $1,693.4 $1,798.6 13.0% 17.9% 25.2%
Management Reserve $.0 $.0 $17.9 $30.7 $59.6
Overall Total $1,436.2 $1,436.2 $1,648.2 $1,717.8 $1,825.1 14.8% 19.6% 27.1%

Note the values in the above table are for a fictitious project

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 Summary

The cost risk model built in @Risk used a variety of techniques to both represent
uncertainty from ranging workshops and from other studies. Highlights include:

Use of the RiskGeneral function to mimic the Double Triangular Distribution

recommended by AACE for range estimating

Use of the Fit Manager to replicate output from other models as input to the overall risk
model, in particular:
- Results from a quantitative schedule risk analysis
- Results from systemic parametric risk analysis
- Automatic recalculation of the curve fit on change of input data

Use of RiskPercentile and other output functions to provide templated report formats
that can be copied and pasted direct into presentational materials

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Any Questions

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