Practical Applications of Risk Analysis During Design and Construction

1. Steve Farkus, PE, PMP, Tim Mather, PMP Herschel Baxi, PMP and Eric Lowther, PMP. LEED AP Louisville District and PMA Consultants LLC May 2011 PPM CoP Conference ID # 36 Practical Applications of Risk Analysis During Design and Construction

2. Overview • The nation-wide Army Reserve Construction Program • Customer: Army Reserve Installation Management Directorate (ARIMD) • Project Phases: Design and Construction Overview Template - 2011 PPM CoP Conference

3. BLUF • We can best manage Customer expectations when we clearly spell out risks. • Customer accountability will increase when risk is understood. • Our Purpose Today – Inform our audience about quantitative techniques we can use to communicate more clearly. Communicate Risk and You Manage Expectations

4. Risks to Consider • During P&D: • How confident are we in our construction cost estimate? • When will we be RTA? • During Construction : • How confident are we in the contractor’s schedule for completion? What are our Greatest Risks?

5. Risk Management • Key Processes (PMBOK)*: • Risk Management Planning • Risk Identification • Qualitative Risk Analysis • Quantitative Risk Analysis • Risk Response Planning • Risk Monitoring and Control • Measuring the probability and consequences of risks and estimating their implications for project objectives. *Source: A Guide to the Project Management Body of Knowledge, Chapter 11

6. Simulation in Risk Management • How to use Simulation in Risk Management • What is Monte Carlo? • Where did it come from? • How does it work?

7. Simulation in Risk Management • How to use simulation • Create a model of the critical activities/costs • Assign three possible durations to each activity or three possible costs to each cost • Run a simulation (Monte Carlo)

8. Simulation in Risk Management • What is Monte Carlo? • Definition: Monte Carlo is the art of approximating an expectation by the sample mean of a function of simulated random variables

9. Simulation in Risk Management • Where did Monte Carlo come from? • Enrico Fermi invented the method while playing solitaire during a convalescence. • Further developed when working on the Manhattan Project working on calculating potential range of neutron diffusion • Named Monte Carlo because they needed a code name • Named after the famous casino in Monaco

10. How Simulation Works OPTD MOST PESS OPTD MOST PESS 6 8 15 8 10 20 OPTD MOST PESS 8 days C 10 days 2 4 7 B OPTD MOST PESS D 4 days 8 10 15 10 days 10 days A OPTD MOST PESS 8 days H F 7 10 16 OPTD MOST PESS 2 days 5 8 12 5 days E OPTD MOST PESS G OPTD MOST PESS 1 2 4 5 days 4 6 10 OPTD MOST PESS 4 5 9

11. Iteration Number 1 Completion of “H” (A-B-C-D-H): 38 days RNG RNG 14 11 RNG OPTD MOST PESS OPTD MOST PESS 4 6 8 15 8 10 20 OPTD MOST PESS 8 days C 10 days 2 4 7 B OPTD MOST PESS D 4 days 8 10 15 10 days 10 days RNG A OPTD MOST PESS 8 days 9 H F 7 10 16 OPTD MOST PESS RNG 2 days RNG 5 8 12 11 5 days 9 E OPTD MOST PESS G OPTD MOST PESS 1 2 4 5 days 4 6 10 RNG OPTD MOST PESS RNG 1 4 5 9 7 RNG 5

12. Iteration Number 2 Completion of “H” (A-B-C-D-H): 31 days RNG RNG 8 9 RNG OPTD MOST PESS OPTD MOST PESS 3 6 8 15 8 10 20 OPTD MOST PESS 8 days C 10 days 2 4 7 B OPTD MOST PESS D 4 days 8 10 15 10 days 10 days RNG A OPTD MOST PESS 8 days 11 H F 7 10 16 OPTD MOST PESS RNG 2 days RNG 5 8 12 11 5 days 7 E OPTD MOST PESS G OPTD MOST PESS 1 2 4 5 days 4 6 10 RNG OPTD MOST PESS RNG 3 4 5 9 6 RNG 5

13. Iteration Number 3 Completion of “H” (A-B-F-H): 32 days RNG RNG 6 9 RNG OPTD MOST PESS OPTD MOST PESS 4 6 8 15 8 10 20 OPTD MOST PESS 8 days C 10 days 2 4 7 B OPTD MOST PESS D 4 days 8 10 15 10 days 10 days RNG A OPTD MOST PESS 8 days 8 H F 7 10 16 OPTD MOST PESS RNG 2 days 5 8 12 16 5 days RNG E OPTD MOST PESS G OPTD MOST PESS 12 1 2 4 5 days 4 6 10 RNG OPTD MOST PESS RNG 1 4 5 9 7 RNG 5

14. Simulation in Risk Management • Simulation can be an effective tool to evaluate a range of possible outcomes • The output is only as good as the input

15. Cost Risk • Basic Steps in a Cost Risk Assessment • Identify and Rank Risks • All risks not modeled • Review A/E’s estimate • Don’t double dip on contingency What is the Cost Risk Modeling Process?

16. Cost Risk (cont.) • Range and Model cost risks • Include key stakeholders • Some risks may apply to project costs • Monte Carlo modeling • Report • Communicate to stakeholders What is the Cost Risk Modeling Process?

17. Cost Risk – Identify Your Risks A Project Has Many Risks

18. Cost Risk – Identify Your Risks A Project Has Many Risks

19. Cost Risk – Rank Your Risks Risks With Most Impact Selected for Cost Risk Assessment

20. Cost Risk – A/E Estimate Review • Review the A/E’s Estimate • Review for built in contingencies • Lump sum line items • % age of sub totals • Quantity / Unit Price • Cost Risk Assessment develops contingency at the project level based on risks • No double dips The A/E Estimate may have contingencies built in

21. Cost Risk - Modeling • Range and Model the Costs • Optimistic, Pessimistic, Most Likely • Project team input • Model using Monte Carlo Estimate a range of the impact of risks

22. Cost Risk – Modeling Sample Project Team Assesses Optimistic, Most Likely, Pessimistic

23. Cost Risk – Modeling & Reporting • Model • Software runs many iterations of selected risks impacting the project • Report • Probability of delivering within approved budget • Risk-based project contingency • Meaningful statistical analysis on risks Communicating to Stakeholders

24. Cost Risk – Reporting Samples Reports Communicate Impact of Risks on Cost

25. Cost Risk – Reporting Samples Reports Communicate Impact of Risks on Cost

26. Cost Risk – Additional Take-Aways • A/E Estimate is not total project cost • Risks can apply at a project level • Procurement process • Environmental complexities • Develop Historical Information • Scalable Process Cost Risk Assessments Enhances Project Management

27. Conclusion • Simulation is a valuable tool in the toolkit of every project manager • It’s important to create an accurate model and range for each activity or cost. • Not a panacea

28. Summary • We can best manage Customer expectations when we clearly spell out risks. • Customer accountability will increase when risk is understood. • Our Purpose Today – Inform our audience about quantitative techniques we can use to communicate more clearly. Communicate Risk and You Manage Expectations

29. Questions? Pay Attention to Risk and the Table is Set for Success