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Covered with Oil: Incorporating Realism in Cost Risk Analysis

Risk Track




When Jimmy Buffett sang the words “All of those tourists covered with oil” in his song Margaritaville he probably never imagined that this phrase might apply to crude oil instead of suntan lotion. Both the cost and the environmental impact from the 2010 oil spill in the Gulf of Mexico were much worse than anyone had expected or could have predicted. It was, in the words of financial writer Nassim Taleb, a “black swan” an unexpected event with tremendous consequences. These types of events, like Hurricane Katrina in 2005, the giant tsunami in the Indian Ocean in 2004, and the financial crisis that began in 2007 are all examples of events with huge impacts that are hard to predict. In the arena of government projects, outsize events such as the Challenger and Columbia Space Shuttle disasters often cost billions of extra dollars and are not budgeted against. While it may be reasonable to not budget for some events that are outside of project managements control, since doing so will likely lead to excess reserves that go unspent, the opposite if often the case. And unlike natural disasters, project managers have some control over their destiny in the sense that they can meet budget, schedule, and scope by cutting content, and in the cases of extreme overruns, those in authority can cancel projects once they reach a certain amount of cost growth. But budgets for public projects typically include very little risk reserves, and do not account for even minimal changes in a projects design or mild external forces that should be accounted for. In this paper, the author examines historical cost risk analyses and compares them to final actual costs, finding significant differences between the two. Reasons for under representation of risk are discussed, and remedies for this situation are discussed, including the notion of calibration.


Christian Smart
Missile Defense Agency
Dr. Christian Smart is currently employed as the director for cost estimating and analysis at the Missile Defense Agency (MDA). In this capacity, he is responsible for overseeing all cost estimating activities developed and produced by the agency, and directs the work of a 100-person team. Prior to joining MDA, Dr. Smart worked as a senior parametric cost analyst and program manager with Science Applications International Corporation. An experienced estimator and analyst, he was responsible for risk analysis and cost integration for NASA’s Ares launch vehicles. Dr. Smart spent several years overseeing improvements and updates to the NASA/Air Force Cost Model and has developed numerous cost models and techniques that are used by Goddard Space Flight Center, Marshall Space Flight Center, and NASA HQ. In 2010, he received an Exceptional Public Service Medal from NASA for his contributions to the Ares I Joint Cost Schedule Confidence Level Analysis and his support for the Human Space Flight Review Panel led by Norm Augustine. He has given numerous presentations on cost modeling and risk analysis both in the U.S. and abroad. He was awarded best of conference paper at the 2008 Annual Joint ISPA-SCEA conference in Noordwijk for “The Fractal Geometry of Cost Risk,” best of conference paper at the 2009 Annual Joint ISPA-SCEA conference in St. Louis for “The Portfolio Effect and the Free Lunch” and best of conference paper at the 2010 Annual Joint ISPA-SCEA conference in San Diego for “Here, There Be Dragons: Considering the Right Tail in Risk Management.” Dr. Smart was named the 2009 Parametrician of the Year by ISPA. He is a SCEA certified cost estimator/analyst (CCEA), a member of the Society for Cost Estimating and Analysis (SCEA) and the International Society of Parametric Analysts (ISPA). Dr. Smart is a past president of the Greater Alabama Chapter of SCEA, is the managing editor for The Journal of Cost Analysis and Parametrics, and serves as the Region III VP on the SCEA national board of directors. Dr. Smart earned bachelors degrees in Economics and Mathematics from Jacksonville State University, and a Ph.D. in Applied Mathematics from the University of Alabama in Huntsville.