Risk-based Cost and Schedule Estimation for Large Transportation Projects
Michael L J Maher, Golder Associates, IE; Andrew D McGoey-Smith, Golder Associates Ltd., CA
This paper describes a method for estimating cost and schedule on infrastructure projects using a risk-based approach. We show, using project examples, how this approach leads to more effective project and risk management.
Estimates of cost and schedule on large infrastructure projects, such as new motorways, bridges, transit projects, pipelines or oil and gas processing plants, need to be completed at early stages in the feasibility study or preliminary design to allow rational decision-making with respect to necessary financing and approval to proceed. In studies of large infrastructure projects over the past 100 years, engineer?s cost estimates are almost invariably too low when compared with the final project cost upon completion by on average twenty percent but sometimes as much as one hundred percent. These discrepancies arise not because of poor engineering or planning practices but rather because a single number (point estimate) is being used to represent what is intrinsically a random process. Quantities used to compute a project cost for example are often highly uncertain at the time of preparing the estimate and sometimes unknown. In addition, items that were never anticipated, such as delays in acquiring property, labour disputes, or extreme weather come into play and conspire to delay the project and result in spiralling costs. In this paper we describe a systematic and defensible methodology for estimating cost and schedule on large projects using a risk-based approach. We replace point estimates by probability distributions which account for uncertainty explicitly. This methodology has been developed by Golder Associates in association with leading transportation clients, such as the State of Washington Department of Transportation and the Federal Highways Administration, over a number of years and is based upon research and practices in risk analysis. It has also been applied to over 100 infrastructure projects to date worldwide, ranging in value from US $25 million to US $10 billion.
The risk assessment process is carried out in the following stages. First base costs and schedules are estimated for all major activities which comprise the project with contingency removed from the estimates. The activities are then sequenced into a flow chart. Next all major risks are identified which can impact the project activities and are quantified using subjective probability assessments. The mathematical relationships, including correlations between activities, risks and the total cost and schedule are captured and implemented in a conceptual model of the project. Total cost and schedule for the project are then computed using Monte Carlo simulation, which also takes into account the time value of money. This information gathering process is usually conducted in a workshop setting where the risk assessment team acts as an outside, independent third party which elicits project cost and schedule information from a group of professionals who were involved in calculating the original (not risk-based) cost and schedule as well as developing the engineering design.
In this talk we illustrate a risk-based cost and schedule estimation process with examples on actual projects. We also show how a risk-based approach to cost and schedule estimation leads to more effective risk management through mitigation of the significant risks which are identified and ranked during the risk assessment process. Finally, we illustrate how use of probabilistic quantification of cost and schedule leads to improved decision-making by the project owners and show how it enhances the overall efficiency of managing a large infrastructure project.
Association for European Transport