2013-R101

Benefits of Integrating Schedule and Cost Risk Analysis

Risk I Track

R1-1_Presentation_BenefitsOfIntegratingScheduleAndCostRiskAnalysis_Hartke

Abstract:

Project managers have the arduous task of running their projects within budget and deadlines, all while facing a wide range of risks like prices and labor costs uncertainty, suppliers performance and reliability, technological challenges, weather, currency exchange rates, etc. Thus, assessing the likelihood and impact of risks is of utmost importance to manage not only the project itself, but also the expectations of the various stakeholders.

Schedule risk analysis aims at understanding and quantifying how risks might impact the different project’s tasks and allows project managers to provide more reliable deadlines. It also helps in establishing contingencies for milestones and evaluating mitigation strategies.

Likewise, cost risk analysis provides a clearer picture of the total cost of the project and its contingencies by focusing on the cost structure of each task. Yet, some tasks are made up mostly of lump sum costs, equipment and machinery to be purchased for example, while some other tasks depend both on duration and unit cost of resources, like labor costs (worked hours times wages) and equipment lease (lease duration times unit cost of the equipment) for example. Also, in tasks that run in parallel exhibiting “finish-to-finish” dependency structure the duration of one task might greatly impact the cost of the other task. Thus, the uncertain duration of some tasks in the project might have a compound effect on the total cost risk.

This presentation will:
• Off an example of an integrated schedule and cost risk analysis for an offshore oil production development project
• Highlight how this integration provides a clearer picture of project risks (like the probabilities of meeting deadlines and finishing within budget)
• Explain how different resource allocation schemes affect the project
• Demonstrate the impacts of all risks on the project’s cash flow

The necessary tools to properly perform this kind of risk analysis using Monte Carlo simulation will also be presented, along with insights on how to evaluate available mitigation strategies. Many recent publications make a point of the importance of integrating Schedule and Cost Risk Analysis to properly evaluate the risk of cost overrun, identify key risk drivers, and design mitigation strategies. Some key risk drivers have a compound effect on Schedule and Cost, and mitigation strategies need to acknowledge this.

A risk analysis integrating both schedule and cost allows theses complex dependencies to be easily modeled and explicitly shows the compound impact of uncertain durations both on deadlines and total cost. It also brings benefits regarding resource allocation for the project: different resource allocation schemes may be tested in the model and their impact on the probability of meeting deadlines within budget easily assessed. Finally, looking at the project’s cash flow, an integrated schedule and cost risk analysis might suggest that even more aggressive mitigation strategies.

Author:

Rafael Hartke
Palisade Corporation
Rafael Hartke, MSc, MBA, ERP, is an engineer with experience in both energy and finance, and serves as an Oil and Energy Industry Consultant at Palisade Corporation. His work focuses on the development of quantitative risk models and methodologies for decision analysis in engineering and finance (DCF, NPV, VOI and CFaR in complex investment projects, Monte Carlo simulation, portfolio optimization, decision trees and real options). He also offers training in decision analysis, project risk analysis and Monte Carlo simulation.
He has particular experience and interest in the oil and energy business, from his previous position at Brazilian-based energy corporation Petrobras, where he participated in the risk analysis of major upstream capital projects like Brazilian Pre-Salt giant fields, Gulf of Mexico projects, and multi-client infrastructure offshore projects.