Risk Analysis in Cost Estimation

Risk Assessment. Risk assessment is “The process of quantifying the probability of a risk occurring and its likely impact on the project”. It is often undertaken, at least initially, on a qualitative basis by which I mean the use of a subjective method of assessment rather than a numerical or stochastic (probablistic) method. Such methods seek to assess risk to determine severity or exposure, recording the results in a probability and impact grid or ‘risk assessment matrix'. The infographic provides one example which usefully visually communicates the assessment to the project team and interested parties. Probability may be assessed using labels such as: Rare, unlikely, possible, likely and almost certain; whilst impact considered using labels: Insignificant, minor, medium, major and severe. Each label is assigned a ‘scale value’ or score with the values chosen to align with the risk appetite of the project and sponsoring organisation. The product of the scale values (i.e. probability x impact) resulting in a ranking index for each risk. Thresholds should be established early in the life cycle of the project for risk acceptance and risk escalation to aid decision-making and establish effetive governance principles. Risk assessment matrices are useful in the initial assessment of risk, providing a quick prioritisation of the project’s risk environment. It does not, however, give a full analysis of risk exposure that would be accomplished by quantitative risk analysis methods. Quantitative risk analysis may be defined as: “The estimation of numerical values of the probability and impact of risks on a project usually using actual or estimated values, known relationships between values, modelling, arithmetical and/or statistical techniques”. Quantitative methods assign a numerical value (e.g. 60%) to the probability of the risk occurring, where possible based on a verifiable data source. Impact is considered by means of more than one deterministic value (using at least 3-point estimation techniques) applying a distribution (uniform, normal or skewed) across the impact values. Quantitative risk methods provide a means of understanding how risk and uncertainty affect a project’s objectives and a view of its full risk exposure. It can also provide an assessment of the probability of achieving the planned schedule and cost estimate as well as a range of possible out-turns, helping to inform the provision of contingency reserves and time buffers. #projectmanagement #businesschange #roadmap

What level of contingency is required to achieve the cost certainty goal in public infrastructure projects? For the public sector, cost certainty provides #stability and #predictability. It enables public decision-makers to evaluate options accurately and make informed Go/No Go choices. However, empirical evidence from existing literature highlights that the public #infrastructure projects often fall short in accounting for cost increases incurred during construction phase mainly due to underestimating the required contingency percentage at the time of investment decision [1].   For example, in the study conducted by Love, Peter ED, et al. (2017) the mean cost overrun of 67 public infrastructure projects reported 23.75%. This indicates that the "traditional deterministic contingency estimate between 2 and 5% which is often applied at the award of a tender would have obviously been inadequate for the sampled projects" [1]. Thus, given the unequivocal need for cost certainty, a much higher level of contingency at the time of awarding a tender may be required considering risks and uncertainties involved in the project. For instance, as shown in the attached Figure, the accuracy of an estimate improves as more information becomes available but in reality, this could be fallacy, especially for schedule driven projects. When a project goes to tender, drawings and BoQs may be inaccurate, incomplete, and/or seldom available due to many factors including level of scope definition, availability of design information (e.g., geotechnical), errors and omissions in documentation. Therefore, it is necessary to have a sufficient contingency allowance in place accounting for possible cost increases may incurred during construction phase. Accurate estimation and realistic allocation of cost contingency play a pivotal role in mitigating the risk of future cost overruns. As stated in the paper "If change is not embraced, then cost overruns will continue” [1]. Therefore, identifying potential causes of future changes during the design development phase and incorporating their impact into the contingency estimate is a crucial step toward achieving cost certainty in public infrastructure projects. In your view, and what are the implications to achieve cost certainty goal in public infrastructure projects? Feel free to share your thoughts or any additional insights! Source: [1] https://lnkd.in/gU3XTBxK #decisionmaking #uncertainty #riskrmanagement #infrastructure #cost #costoverrun #construction #designengineering Hatch Metrolinx Infrastructure Ontario Ontario Power Generation The Canadian Council for Public-Private Partnerships

Stop doing risk assessments no one reads. You already have to do one every year—why not make it useful? Most assessments get buried because they’re qualitative, vague, and disconnected from the decisions that actually matter. Here’s the fix: → Upgrade to a semi-quantitative assessment that clearly shows what’s most likely to go wrong—and what it would cost. → Then take your top 3–5 material risks and run a simple quantitative analysis. Think: loss expectancy, downtime thresholds, incident response costs. You don’t need a math degree. You just need better structure, tighter inputs, and a little courage to stop playing the compliance game. Because when done right, that same assessment suddenly becomes: - A tool for executive reporting - A foundation for budget justification - A forcing function for business alignment Risk assessments shouldn’t sit on a shelf. They should drive action.

When you’re asked for an estimate and it’s treated like a deadline. A risk burndown can help your stakeholders understand the complexities involved in estimating the work. It enables teams to identify the unknowns and prioritise de-risking. 1) As a team, identify all the risks you can think of 2) Guesstimate how likely they are to happen (as a percentage) 3) Guesstimate how much effort would be involved if the risk happened 4) Multiply the likelihood by the effort to calculate the risk exposure 5) Add all the risk exposure totals together to get your overall risk exposure total 6) Plot this on a graph each week to track how your exposure changes over time. It’s not an exact science but it gives you, your team and your stakeholders a better understanding of the situation and inherent risks.