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

Overview Template - 2011 PPM CoP Conference 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

Communicate Risk and You Manage Expectations 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

What are our Greatest Risks? 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?

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. PMBOK identifies 6 major components to Risk Management. This lesson will focus on Quantitative Risk Analysis. *Source: A Guide to the Project Management Body of Knowledge, Chapter 11

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

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)

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

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

How Simulation Works C B D A H F E G 6 8 15 8 10 20 2 4 7 8 10 15 7 10 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

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

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

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

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

What is the Cost Risk Modeling Process? 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?

What is the Cost Risk Modeling Process? 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?

Cost Risk – Identify Your Risks A Project Has Many Risks

Cost Risk – Identify Your Risks A Project Has Many Risks

Cost Risk – Rank Your Risks Risk No. Probability Impact Risk Impact Risk Rank Cost Element Description A/E Estimate R12 High HH 1 Facility operations may impact planned availability of construction zones increasing duration of work. $150,000 R4, R10 2 Finished tenant interiors may be exposed to elements causing rework leading to increase in project costs. $125,000 R9 Moderate HM 3 Staging and access coordination with roof replacement contractor could delay construction within building interiors. $75,000 R14 4 Fireproofing $60,000 R1 MH 5 Additional quantities of hazardous materials remediation could increase construction costs. $50,000 R3 6 Lane closure limitations may interrupt supply of materials R6 7 Corrosion of steel support system behind metal fascia may require additional rehabilitation R5 8 Modifications to scaffolding to complete equipment relocation $25,000 R11 MM 9 Identity and background check requirements R13 10 Utility relocations R7 11 CMU replacement in parapet $10,000 Risks With Most Impact Selected for Cost Risk Assessment

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 What is the A/E estimate giving you? What is Monte Carlo giving you? Range all your guesses Why would we do a cost risk assessment How do I hit it home that we need cost risk At P&D A/E gives no schedule, just estimate on total duration Contractor does submit a baseline schedule The A/E Estimate may have contingencies built in

Estimate a range of the impact of risks Cost Risk - Modeling Range and Model the Costs Optimistic, Pessimistic, Most Likely Project team input Model using Monte Carlo 2 Story Office Building, Vehicle Maintenance Shop, Unheated Storage building, 15 to 18 Acre Typical project in this program Sprinklers HVAC Air handling System Profit / Overhead Steel Erection, 18% of Work Concrete Earthwork A/E what is your estimate? Estimate a range of the impact of risks

Cost Risk – Modeling Sample Risk No. Probability Impact Risk Impact Risk Rank Cost Element Description Optimistic Most Likely Pessimistic R12 High HH 1 Facility operations may impact planned availability of construction zones increasing duration of work. $100,000 $150,000 $200,000 R4, R10 2 Finished tenant interiors may be exposed to elements causing rework leading to increase in project costs. $75,000 $125,000 $175,000 R9 Moderate HM 3 Staging and access coordination with roof replacement contractor could delay construction within building interiors. $50,000 $250,000 R14 4 Fireproofing $0 $60,000 $120,000 R1 MH 5 Additional quantities of hazardous materials remediation could increase construction costs. R3 6 Lane closure limitations may interrupt supply of materials R6 7 Corrosion of steel support system behind metal fascia may require additional rehabilitation R5 8 Modifications to scaffolding to complete equipment relocation $25,000 R11 MM 9 Identity and background check requirements $40,000 R13 10 Utility relocations R7 11 CMU replacement in parapet $10,000 Project Team Assesses Optimistic, Most Likely, Pessimistic

Cost Risk – Modeling & Reporting 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 How does this help me? Communicating to Stakeholders

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

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

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

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

Communicate Risk and You Manage Expectations 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

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