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US Army Corps of Engineers BUILDING STRONG ® Practical Applications of Risk Analysis During Design and Construction 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

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

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BUILDING STRONG ® 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

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BUILDING STRONG ® 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 contractors schedule for completion? What are our Greatest Risks?

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

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BUILDING STRONG ® Simulation in Risk Management How to use Simulation in Risk Management What is Monte Carlo? Where did it come from? How does it work?

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BUILDING STRONG ® 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)

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BUILDING STRONG ® 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

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BUILDING STRONG ® 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

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BUILDING STRONG ® How Simulation Works A B E C F D H G 4 days 8 days 10 days 2 days 5 days 10 days 8 days 4610 OPTDMOSTPESS OPTDMOSTPESS 247 OPTDMOSTPESS 124 OPTDMOSTPESS 459 OPTDMOSTPESS 6815 OPTDMOSTPESS OPTDMOSTPESS 5812 OPTDMOSTPESS OPTDMOSTPESS

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BUILDING STRONG ® Iteration Number 1 A B E C F D H G 4 days 8 days 10 days 2 days 5 days 10 days 8 days 4610 OPTDMOSTPESS OPTDMOSTPESS 247 OPTDMOSTPESS 124 OPTDMOSTPESS 459 OPTDMOSTPESS 6815 OPTDMOSTPESS OPTDMOSTPESS 5812 OPTDMOSTPESS OPTDMOSTPESS 7 RNG RNG RNG 11 RNG Completion of H (A-B-C-D-H): 38 days

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BUILDING STRONG ® A B E C F D H G 4 days 8 days 10 days 2 days 5 days 10 days 8 days 4610 OPTDMOSTPESS OPTDMOSTPESS 247 OPTDMOSTPESS 124 OPTDMOSTPESS 459 OPTDMOSTPESS 6815 OPTDMOSTPESS OPTDMOSTPESS 5812 OPTDMOSTPESS OPTDMOSTPESS 6 RNG RNG RNG Completion of H (A-B-C-D-H): 31 days Iteration Number 2

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BUILDING STRONG ® A B E C F D H G 4 days 8 days 10 days 2 days 5 days 10 days 8 days 4610 OPTDMOSTPESS OPTDMOSTPESS 247 OPTDMOSTPESS 124 OPTDMOSTPESS 459 OPTDMOSTPESS 6815 OPTDMOSTPESS OPTDMOSTPESS 5812 OPTDMOSTPESS OPTDMOSTPESS 7 RNG RNG 6 16 RNG Completion of H (A-B-F-H): 32 days Iteration Number 3

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BUILDING STRONG ® 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

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BUILDING STRONG ® Cost Risk Basic Steps in a Cost Risk Assessment Identify and Rank Risks All risks not modeled Review A/Es estimate Dont double dip on contingency What is the Cost Risk Modeling Process?

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BUILDING STRONG ® 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?

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BUILDING STRONG ® Cost Risk – Identify Your Risks A Project Has Many Risks

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BUILDING STRONG ® Cost Risk – Identify Your Risks A Project Has Many Risks

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BUILDING STRONG ® Cost Risk – Rank Your Risks Risks With Most Impact Selected for Cost Risk Assessment Risk No.ProbabilityImpactRisk Impact Risk RankCost Element DescriptionA/E Estimate R12High HH1 Facility operations may impact planned availability of construction zones increasing duration of work.$150,000 R4, R10High HH2 Finished tenant interiors may be exposed to elements causing rework leading to increase in project costs.$125,000 R9HighModerateHM3 Staging and access coordination with roof replacement contractor could delay construction within building interiors.$75,000 R14HighModerateHM4Fireproofing$60,000 R1ModerateHighMH5 Additional quantities of hazardous materials remediation could increase construction costs.$50,000 R3HighModerateHM6Lane closure limitations may interrupt supply of materials$50,000 R6High HH7 Corrosion of steel support system behind metal fascia may require additional rehabilitation$50,000 R5ModerateHighMH8Modifications to scaffolding to complete equipment relocation$25,000 R11Moderate MM9Identity and background check requirements$25,000 R13Moderate MM10Utility relocations$25,000 R7High HH11CMU replacement in parapet$10,000

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BUILDING STRONG ® Cost Risk – A/E Estimate Review Review the A/Es 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

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BUILDING STRONG ® 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

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BUILDING STRONG ® Cost Risk – Modeling Sample Project Team Assesses Optimistic, Most Likely, Pessimistic Risk No.ProbabilityImpactRisk Impact Risk RankCost Element DescriptionOptimisticMost LikelyPessimistic R12High HH1 Facility operations may impact planned availability of construction zones increasing duration of work.$100,000$150,000$200,000 R4, R10High HH2 Finished tenant interiors may be exposed to elements causing rework leading to increase in project costs.$75,000$125,000$175,000 R9HighModerateHM3 Staging and access coordination with roof replacement contractor could delay construction within building interiors.$50,000$75,000$250,000 R14HighModerateHM4Fireproofing$0$60,000$120,000 R1ModerateHighMH5 Additional quantities of hazardous materials remediation could increase construction costs.$0$50,000$100,000 R3HighModerateHM6Lane closure limitations may interrupt supply of materials$0$50,000 R6High HH7 Corrosion of steel support system behind metal fascia may require additional rehabilitation$0$50,000$100,000 R5ModerateHighMH8Modifications to scaffolding to complete equipment relocation$0$25,000 R11Moderate MM9Identity and background check requirements$25,000 $40,000 R13Moderate MM10Utility relocations$25,000 $50,000 R7High HH11CMU replacement in parapet$0$10,000$25,000

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BUILDING STRONG ® 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

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BUILDING STRONG ® Cost Risk – Reporting Samples Reports Communicate Impact of Risks on Cost

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BUILDING STRONG ® Cost Risk – Reporting Samples Reports Communicate Impact of Risks on Cost

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BUILDING STRONG ® 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

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BUILDING STRONG ® Conclusion Simulation is a valuable tool in the toolkit of every project manager Its important to create an accurate model and range for each activity or cost. Not a panacea

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BUILDING STRONG ® 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

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BUILDING STRONG ® Questions? Pay Attention to Risk and the Table is Set for Success

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