Taking a Second Look: The Potential Pitfalls of Popular Risk Methodologies
As risk analysis has come into its own as a specialized field under the larger umbrella of cost estimating, certain practices and methodologies have been developed and generally accepted by the community at large. The creation of more standardized methodologies has opened risk analysis to a much larger population and skill set than previously allowed. Unfortunately, without a certain level of scrutiny, these accepted methods can lead to results that are not in accordance with the spirit of the methodology. In some cases, the combination of methodologies can even lead to results that are mathematically unsound. This paper will examine some of the popular risk analysis methodologies and present situations where they could lead to flawed results and conclusions. It will begin by focusing on the way risks are identified and quantified and will then move into a discussion of how individual risks are combined to produce a program level risk assessment. The paper will conclude with a thought experiment related to the assumption of a base log-normal cost growth distribution.
Eric R. Druker graduated from the College of William and Mary with a B.S. in Applied Mathematics in 2005 concentrating in both Operations Research and Probability & Statistics with a minor in Economics. Over the past two years he has been employed by Northrop Grumman as an Operations Research Analyst. He performs cost and risk analysis on several programs within both the Intelligence and DoD communities. Mr.
Druker has also worked on high profile projects such as the Virginia Information Technology Agency and the United States Army Corps of Engineers (USACE) proposals. He was a recipient of the 2005 NGIT President’s award for his work on several high profile Independent Cost Evaluations during which he helped to develop the risk process currently used by NGIT’s ICE teams. He has also performed decision tree analysis for NG Corporate law and built models for Hurricane Katrina Impact Studies and Schedule/Cost Growth determination.
Richard L. Coleman is a 1968 Naval Academy graduate, received an M. S. with Distinction from the U. S. Naval Postgraduate School and retired from active duty as a Captain, USN, in 1993. His service included tours as Commanding Officer of USS Dewey (DDG 45), and as Director, Naval Center for Cost Analysis. He has worked extensively in cost, CAIV, and risk for the Missile Defense Agency (MDA), Navy ARO, the intelligence community, NAVAIR, and the DD(X) Design Agent team. He has supported numerous ship programs including DD(X), the DDG 51 class, Deepwater, LHD 8 and LHA 6, the LPD 17 class, Virginia class submarines, CNN 77, and CVN 21. He was recently appointed as the Director of the Cost and Price Analysis Center of Excellence and conducts Independent Cost Evaluations on Northrop Grumman programs.
He has more than 50 professional papers to his credit, including five ISPA/SCEA and SCEA Best Paper Awards and two ADoDCAS Outstanding Contributed Papers. He was a senior reviewer for all the SCEA CostPROF modules and lead author of the Risk Module. He has served as Regional and National Vice President of SCEA.
Chris Leonetti is an Operations Research Analyst for Northrop Grumman IT, Intelligence (TASC). He performs cost and risk analysis on several programs within both the Intelligence and DoD communities. Previously, Mr. Leonetti was a member of the TASC cost team for the United States Navy’s DDG-1000 and CG(X) programs. Mr.
Leonetti also works on Independent Cost Evaluation (ICE) teams doing internal risk assessments. Mr. Leonetti received his B.S. from the College of William & Mary in Applied Mathematics with a second major in Government in May 2004 and his M.S. in Computational Operations Research in December 2005.
Peter J. Braxton holds an AB in Mathematics from Princeton University and an M. S. in Applied Science (Operations Research) from the College of William and Mary.
He has worked to advance the state of knowledge of cost estimating, Cost As an Independent Variable (CAIV), Target Costing, and risk analysis on behalf of the Navy Acquisition Reform Office (ARO), the DD(X) development program, and other ship and intelligence community programs. He has co-authored several professional papers, including ISPA/SCEA International Conference award-winners in CAIV (1999) and Management (2005). He served as managing editor for the original development of the acclaimed Cost Programmed Review Of Fundamentals (CostPROF) body of knowledge and training course materials and is currently undertaking to lead a large team of cost professional in a comprehensive update thereof. He serves as SCEA’s Director of Training and was recently appointed a Northrop Grumman Technical Fellow.