Presentation on theme: "Practical Applications of Risk Analysis During Design and Construction"— Presentation transcript:
1 Practical Applications of Risk Analysis During Design and Construction Steve Farkus, PE, PMP, Tim Mather, PMP Herschel Baxi, PMPand Eric Lowther, PMP. LEED APLouisville District andPMA Consultants LLCMay 2011 PPM CoP ConferenceID # 36
2 Overview Template - 2011 PPM CoP Conference The nation-wide Army Reserve Construction ProgramCustomer: Army Reserve Installation Management Directorate (ARIMD)Project Phases: Design and ConstructionOverview Template PPM CoP Conference
3 Communicate Risk and You Manage Expectations BLUFWe 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 What are our Greatest Risks? Risks to ConsiderDuring 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 IdentificationQualitative Risk AnalysisQuantitative Risk AnalysisRisk Response PlanningRisk Monitoring and ControlMeasuring 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
6 Simulation in Risk Management How to use Simulation in Risk ManagementWhat is Monte Carlo?Where did it come from?How does it work?
7 Simulation in Risk Management How to use simulationCreate a model of the critical activities/costsAssign three possible durations to each activity or three possible costs to each costRun 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 diffusionNamed Monte Carlo because they needed a code nameNamed after the famous casino in Monaco
10 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 OPTDMOSTPESSOPTDMOSTPESS681581020OPTDMOSTPESS8 daysC10 days247BOPTDMOSTPESSD4 days8101510 days10 daysAOPTDMOSTPESS8 daysHF71016OPTDMOSTPESS2 days58125 daysEOPTDMOSTPESSGOPTDMOSTPESS1245 days4610OPTDMOSTPESS459
11 Completion of “H” (A-B-C-D-H): 38 days Iteration Number 1ABECFDHG4 days8 days10 days2 days5 days4610OPTDMOSTPESS81527159201216RNG1114Completion of “H” (A-B-C-D-H): 38 days
12 Completion of “H” (A-B-C-D-H): 31 days Iteration Number 2ABECFDHG4 days8 days10 days2 days5 days4610OPTDMOSTPESS81527159201216RNG311Completion of “H” (A-B-C-D-H): 31 days
13 Completion of “H” (A-B-F-H): 32 days Iteration Number 3ABECFDHG4 days8 days10 days2 days5 days4610OPTDMOSTPESS81527159201216RNGCompletion of “H” (A-B-F-H): 32 days
14 Simulation in Risk Management Simulation can be an effective tool to evaluate a range of possible outcomesThe output is only as good as the input
15 What is the Cost Risk Modeling Process? Basic Steps in a Cost Risk AssessmentIdentify and Rank RisksAll risks not modeledReview A/E’s estimateDon’t double dip on contingencyWhat is the Cost Risk Modeling Process?
16 What is the Cost Risk Modeling Process? Cost Risk (cont.)Range and Model cost risksInclude key stakeholdersSome risks may apply to project costsMonte Carlo modelingReportCommunicate to stakeholdersWhat 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 Risk No.ProbabilityImpactRisk ImpactRisk RankCost Element DescriptionA/E EstimateR12HighHH1Facility operations may impact planned availability of construction zones increasing duration of work.$150,000R4, R102Finished tenant interiors may be exposed to elements causing rework leading to increase in project costs.$125,000R9ModerateHM3Staging and access coordination with roof replacement contractor could delay construction within building interiors.$75,000R144Fireproofing$60,000R1MH5Additional quantities of hazardous materials remediation could increase construction costs.$50,000R36Lane closure limitations may interrupt supply of materialsR67Corrosion of steel support system behind metal fascia may require additional rehabilitationR58Modifications to scaffolding to complete equipment relocation$25,000R11MM9Identity and background check requirementsR1310Utility relocationsR711CMU replacement in parapet$10,000Risks With Most Impact Selected for Cost Risk Assessment
20 Cost Risk – A/E Estimate Review Review the A/E’s EstimateReview for built in contingenciesLump sum line items% age of sub totalsQuantity / Unit PriceCost Risk Assessment develops contingency at the project level based on risksNo double dipsWhat is the A/E estimate giving you?What is Monte Carlo giving you? Range all your guessesWhy would we do a cost risk assessmentHow do I hit it home that we need cost riskAt P&DA/E gives no schedule, just estimate on total durationContractor does submit a baseline scheduleThe A/E Estimate may have contingencies built in
21 Estimate a range of the impact of risks Cost Risk - ModelingRange and Model the CostsOptimistic, Pessimistic, Most LikelyProject team inputModel using Monte Carlo2 Story Office Building, Vehicle Maintenance Shop, Unheated Storage building, 15 to 18 AcreTypical project in this programSprinklersHVACAir handling SystemProfit / OverheadSteel Erection, 18% of WorkConcreteEarthworkA/E what is your estimate?Estimate a range of the impact of risks
22 Cost Risk – Modeling Sample Risk No.ProbabilityImpactRisk ImpactRisk RankCost Element DescriptionOptimisticMost LikelyPessimisticR12HighHH1Facility operations may impact planned availability of construction zones increasing duration of work.$100,000$150,000$200,000R4, R102Finished tenant interiors may be exposed to elements causing rework leading to increase in project costs.$75,000$125,000$175,000R9ModerateHM3Staging and access coordination with roof replacement contractor could delay construction within building interiors.$50,000$250,000R144Fireproofing$0$60,000$120,000R1MH5Additional quantities of hazardous materials remediation could increase construction costs.R36Lane closure limitations may interrupt supply of materialsR67Corrosion of steel support system behind metal fascia may require additional rehabilitationR58Modifications to scaffolding to complete equipment relocation$25,000R11MM9Identity and background check requirements$40,000R1310Utility relocationsR711CMU replacement in parapet$10,000Project Team Assesses Optimistic, Most Likely, Pessimistic
23 Cost Risk – Modeling & Reporting Software runs many iterations of selected risks impacting the projectReportProbability of delivering within approved budgetRisk-based project contingencyMeaningful statistical analysis on risksHow does this help me?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 costRisks can apply at a project levelProcurement processEnvironmental complexitiesDevelop Historical InformationScalable ProcessCost Risk Assessments Enhances Project Management
27 ConclusionSimulation is a valuable tool in the toolkit of every project managerIt’s important to create an accurate model and range for each activity or cost.Not a panacea
28 Communicate Risk and You Manage Expectations SummaryWe 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 Pay Attention to Risk and the Table is Set for Success Questions?Pay Attention to Risk and the Table is Set for Success