1. 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

2. 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 PPM CoP Conference

3. 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

4. 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?

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.
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 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 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

11. 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

12. 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

13. 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

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. 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?

16. 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?

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.
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

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
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

21. 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

22. 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

23. 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

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. 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

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