Practical Risk Analysis 2007 AACEI Conference

1. Practical Risk Analysis 2007 AACEI Conference Presented by: Waymon Lofton & Jerry Coppo

2. AGENDA • Define Risk • Why is Risk Analysis important? • What is an Interview Risk Analysis? • Benefits of Interview Risk Analysis • Building an Interview Risk Analysis model • Using the model • Conclusion • Questions & Answers

3. What is Risk? • Risk defined • Uncertainty with regard to loss; The degree of probability of such loss • Within estimating • estimated costs versus the actual costs

4. Risk Analysis A technique to assess risk and cost $ Contingency $

5. Importance of Risk Analysis • Accurately Predict final cost • Estimates are developed at various stages • Incomplete information = More Risk • Consistent approach • Danger of predetermined bottom line number

6. Traditional Risk Analysis • List project cost components • Set Estimated value = most probable • Predict Min and Max • Run Monte Carlo analysis

7. Difficulties with Traditional Risk Analysis • How to determine what constitutes risk? • Setting ranges are subjective • No documented backup • Need correlation between cost elements

8. Interview Risk Analysis Objective questions about work process and quality of information. Interview Risk Analysis • Does the project have issued for construction (IFC) piping and instrument diagrams (P&ID)? • Does the project have IFC plot plans? • Does the project have isometrics for the piping take-off? Traditional Risk Analysis “How much higher could the piping quantities be?” VS

9. Interview Risk Analysis Continued Answers to the interview determines +/- Cost Range

10. Benefits of an Interview Risk Analysis • Interview questions are definitive YES or NO • Documented backup • Eliminated pre-conceived contingency amount • Required scope documents to yield desired contingency • No Correlation

11. Building an Interview Risk Analysis Organize by Work Process • Scope development for process equipment and quantification of bulk items. • Material pricing • Labor wage rates and productivity • Subcontract pricing • Indirect field cost • Construction Management Cost • Home Office Cost • Other cost, (vendor reps, pre-commissioning, escalation spare parts...)

12. Building an Interview Risk Analysis Cont. Identify Sources of Uncertainty • Source of documentation and systems used • Add additional risk items • (i.e. tight schedule for equipment delivery)

13. Building an Interview Risk Analysis Cont. Set the Percent Min/Max range for each Risk Item • Who should set the ranges? • Should ranges change?

14. Building an Interview Risk Analysis Cont. Once the ranges have been established the subjective nature of risk modeling has been eliminated, the estimator only needs to insure that the interview has been filled out correctly.

15. Using an Interview Risk Analysis Assign Cost to the Risk Items • For each Risk Item, assign a cost from the estimate if it applies

16. Using an Interview Risk Analysis Cont. Run the Simulation and Review the Results • 5000 iterations for convergence • Using a triangular probability density function • Total simulated cost is accumulated for statistical analysis

17. Conclusions • Risk analysis is necessary • The risk analysis can be tied to absolutes about your project • Scope definition is the true basis of uncertainty • The interview risk analysis model allows risk factors drive the contingency calculation. • Purpose driven interaction with project team

18. Q & A