Risk Management for Projects
Risk Management for Projects
CEVP® (Cost Estimate Validation Process) was developed by the Washington State Department of Transportation, with John Reilly, to include cost validation and risk events in the estimation of probable cost and schedule outcomes.
Link to John Reilly International
CEVP® is a Cost and Risk Management process to address the concerns of:
- Why do project costs seem to always go up?
- Why can’t the public and/or private owner’s be told exactly what a project will cost?
- Why can’t project’s be delivered at the cost you told us at the beginning
CEVP opens the “black box” of estimating, ensures cost transparency and provides a profound decision making basis for senior management.
RIAAT is used to fully implement the CEVP-Process. Key features include:
- Hierarchical project tree (WBS)
- Full integration of uncertainties for all cost components on all levels
- Live results and simulation updates within seconds
- Fully integrated cost and schedule model
RIAAT combines a clear project structure and a convenient work flow with vast modeling and simulation capacities.
The Risk-Based Cost Estimating Method
In the risk-based method, the total cost is made up of base costs (quantities times unit prices, both with some variability) plus risk events including risks of delay with associated liquidated damages, risks of escalation, and the cost impact of other higher-level (e.g., political) risks. Risk impacts are determined by estimating the probability of occurrence and the impact of specific risk events (normally in a workshop with project staff and subject matter experts). Dependencies and correlations between specific risks are also elicited and used in modeling.
Since empirical/historical data as input to the risk analysis is often not available, the risk probabilities can be difficult or complex to estimate. The risk-based method characterizes each risk, with individual and specific distributions, such as a large range for large uncertainties or a narrower range for smaller uncertainties. Using this approach, the uncertainty contributing to a particular cost estimate can be modeled more specifically and in greater detail than by use of a single-point deterministic estimate.
Single risks can be evaluated using distributions, and those distributions can be aggregated using simulation methods (e.g., Monte Carlo Simulation or Latin Hypercube Sampling) to determine a probability distribution that represents the overall risk environment.
Value at Risk (VaR) defines a value (e.g., USD) which will not be exceeded at the corresponding probability (risk). In the example , VaR 80 means that the according cost would not be exceeded in 80% of all simulated scenarios. However, even with such coverage, there remains a 20% probability that these cost will be exceeded.
RIAAT Process (Integrated Cost and Schedule Model)
The process used for the integrated cost and schedule model is shown in the Figure below. In the first step, Base Cost is estimated and validated, subjected to uncertainties, and integrated into the Work Breakdown Structure (WBS). Subsequently, identified risks and a markup for unknowns with cost and time impacts will be assessed and integrated into the WBS and the construction schedule.
- Base cost estimate is reviewed, associated with uncertainties and integrated into the WBS.
- Risks are assessed (cost & time impact) and integrated into the WBS.
- Risks are assigned to tasks in the project’s schedule. Subsequently, completion date, critical paths and delays from risks are simulated.
- Cost impact from time delay is calculated with time-related cost and integrated into the WBS.
- Project Cost including uncertainty is available an all WBS levels and for all cost components.
A probabilistic simulation of the construction schedule incorporates all risks with associated time impacts. The results include a construction completion date, delays with respect to specific milestones, critical paths and near-critical paths. The results of the construction schedule are linked back to the WBS, where the time impacts can be associated with time-related costs to evaluate the cost impact of program delays.
After the risk register is complete, all risks with time impact are assigned to the base schedule. The probabilities of occurrence for various critical paths are calculated using Monte Carlo Simulation. Simulation results for the critical paths are shown in the Figure. Each color indicates one critical path. A task with more than one color is part of more than one critical path, e.g., the task “Tender, Contract Award” is made up of all colors. Hence, it is part of all possible critical paths.
A graphical example for interpretation is given in the Figure below. In this example, there is a 60% chance (blue + yellow) that the completion date will be determined by the TBM south drive, but there is also a 30% chance (green + red) that the TBM north drives will become critical. . The D&B drive from the north portal only has a 12% chance of becoming critical.
The construction completion date and the deviation to the original construction completion milestone of the base schedule.
In addition to that, a delay on the critical path causes additional time-related cost. This cost is also calculated using the overall project delay on the critical path.
Range impact diagrams are used to compare risks with respect to their cost or time impact (in this case time). The width of each bar represents the bandwidth of a risk impact from the best case (left end of bar, VaR5) to the worst case (right end of bar, VaR95). Each colored section represents a probability of 10%.
After including time-related cost, a probabilistic cost forecast for all cost components (Base Cost, Risk, Escalation) can be made. The results are shown in the Figure below. The vertical blue line represents the deterministic base cost without uncertainties. Taking into account uncertainties related to the base will result in the blue curve. Adding risk cost results in the red curve. Finally, escalation cost is added to obtain the total project cost. Delta cost is obtained by comparing the total project cost with the deterministic base cost. In this case, a certainty level of VaR80 was chosen to determine the project’s budget.
Change Order Management during Construction Phase
As construction progresses, change order requests, claims and eventually change orders will be issued. They are interlinked with risks, e.g. occurring risks will most likely result in - at least - change order requests.
Therefore, it is advisable to include risk management as well as claim management in the project cost controlling process. At the end of the project a certain amount of change orders will be issued and no more potential risks will be left. Figure below shows an example for a schematic visualization of cost components.
RIAAT offers a hierarchical project structure, full MS Excel Import/Export, advanced risk modeling and numerous options for visualization. Construction schedules are fully integrated into the software. Risks are assigned to tasks of the schedule from the project tree using drag&drop; updated simulation results are obtained within seconds and available “live” during workshops.
- Brenner Base Tunnel (64km ~ 40mi high-speed railway tunnel)
- Koralm Base Tunnel (32.9km ~ 20mi high-speed railway tunnel)
- NAGRA (Swiss National Cooperative for the Disposal of Radioactive Waste)
- Canarsie Tunnel, New York City Transit (L Train tunnel rehabilitation between Brookyn and Manhattan)
- California Water Fix Project (100km ~ 70mi water tunnel)
- Ottawa Light Rail Transit Project (12.5 km ~ 7mi new city line in Ottawa with 13 stations)
- Kraftwerk Spullersee (reservoir power station with approximately 46.7 GWh p.a.)
- Kraftwerk Tauernmoos (pumped storage hydropower station connecting two reservoirs)
- Unterinntaltrasse (40 km ~ 24mi Railway, 32km ~ 19mi of which are underground)
- Stadttunnel Feldkirch (city road tunnel; total length 6,400m ~ 3.1mi; including a four-legged roundabout)
- Kraftwerk Illspitz (hydro-electric power station with approximately 25.5 Mio. kWh p.a.)
- Regionalkraftwerk Mittlerer Inn (river power station with approximately 21 MW)
- Main Railway Station Innsbruck (extension of the railway station)
- Rhine Bridge Duisburg (river bridge connecting the Ruhr Area to the Lower Rhine)
- Subway Extension Vienna (extension of subway line 4)
- Aeropuerto Internacional Jorge Chávez, Lima/Peru (airport development program)
- BART Extension BVS Phase II (Sillicon Valley, San José, USA)