Having already prepared the project schedule, you’re now ready to review the estimate and risk register in preparation for conducting risk workshops. When conducting an IRA, there are a few things that need to be addressed in terms of estimate preparation:
• First and foremost, it is important to ensure that the schedule and the estimate basis are aligned. The foundation of IRA relies on this condition not being violated. If the estimate and schedule basis are not aligned, when costs are mapped to tasks, the cost ‘burn rate’ per unit time will not be correct, and costs associated with schedule change will be incorrectly calculated. Consider some of the following:
- Have the staffing curves that have been used to generate the estimate been prepared based on the current schedule key milestone dates?
- Do both the estimate and the schedule contain inclement weather allowances? If so, are they both equally treated as above or below the line?
- Do both the estimate and the schedule cover exactly the same scope using the same execution philosophy?
• Next consider whether the level of detail and structure of the estimate is sufficient for the purpose of conducting an IRA. The estimate should be sufficiently detailed so as to be able to accurately map the costs to the relevant portions of the schedule, but not so detailed so as to be overly cumbersome to process within a reasonable timeframe. Ideally, the schedule and the estimate should both use a common Work Breakdown Structure (WBS) so as to ensure alignment.
• Third, establish the breakdown of time independent and time dependent costs. Examples of time dependent costs are labour or hired equipment. Time independent costs are typically things like purchased equipment and materials. However, as discussed in
, the commercial conditions in which the project is operating can influence the split of time independent and time dependent costs and must be considered before making these allocations.
• Fourth, ensure that the estimate clearly separates incurred or ‘actual’ costs from remaining costs. In any risk analysis process, it is important to ensure that only remaining costs are ever ranged. Costs that have already been incurred are not subject to uncertainty and must not be ranged during analysis.
• Finally, where possible, existing contingency in the deterministic estimate should be separated out as ‘below the line’ contingency and excluded as an input to the analysis. It is important that all contingency be declared and excluded as an input to any risk analysis. Calculated contingency requirement is an output of the model, not an input to it, and failure to declare contingency will result in overly pessimistic projections.
When considering which costs to include, be mindful of the following two considerations:
• Included cost risk events must not overlap with the cost ranging identified against the estimate (ie. do not ‘double-dip’). Ideally, cost ranges should always omit consideration of things with a probability of existence, as these are better handled as risk events. It is important to be clear before entering a workshop as to where allowances for such uncertainties are to be included; in the ranging or the risk events.
• Ensure that cost impacts of included risk events are not for prolongation costs. Prolongation costs are calculated by the IRA model depending on when and where the risk occurs, and should be omitted as inputs to the model.
However, care should be taken in creating cost hammocks in order to ensure that the cost model behaves correctly. Specifically, the following tips should always be followed when creating cost hammocks for an IRA model:
• Hammocks should only span continuous or near contiguous task ranges. Because costs will be spread evenly across the hammock, it doesn’t make sense for the hammock to be distributed across periods in which no activity takes place.
• Hammocks can only ever be as detailed as the level of detail in the estimate. There is no point creating tasks detailed to the N’th degree when the estimate is highly summarized as this will create problems when trying to figure out how to apportion the costs to the hammock tasks.
• Hammocks should ideally only span tasks with a consistent work loading. If there is a distinct change in the work loading levels in one particular area, a separate hammock should be identified for this period with a corresponding change in the unit rate per period cost.
• Hammocks should easily roll up to the required cost reporting structure.
• Unless the analysis aims to produce a probabilistic cash flow as an output, less attention needs to be given to the mapping of time independent costs. As long as the costs roll up to the required reporting structure, the linkages of the hammock to which they’re mapped will not affect their calculated cost.
Applying costs to the model is a relatively straight-forward, but sometimes time consuming process:
• Having already created the cost hammocks against which costs will be entered, the first job is to ensure that the necessary resources have been allocated to the hammocks as resource assignments against which the costs can be mapped. Most tasks will require at least two resource assignments, a time independent “spread” resource assignment, and a time dependent “normal” resource assignment.
• Next, figure out exactly which estimate line items will be mapped to which cost hammocks. Mappings can be many estimate line items to one cost hammock, but try to avoid mapping one cost line item to multiple hammocks, unless you have the information required to apportion the estimate line item amount between hammocks.
• Once you have figured out all your mappings, you can now sum the budget, remaining, optimistic, most likely, and pessimistic values to be assigned to each task resource assignment.
• Outstanding expenditure excluding contingency can be entered in the ‘remaining’ field, while contingent funds can be entered in the ‘budget’ field.
• For time independent “spread” resources, the optimistic, most likely, and pessimistic costs can be entered directly in the corresponding fields in PRA. However, prior to entering the time dependent “normal” resource distribution values, all three points in the distribution must first be divided by the deterministic remaining duration of the hammock in order to produce a min/likely/max unit rate per time spread.
However, the risk factors module that ports natively with Primavera Risk Analysis is unfortunately not without its problems. Specifically, there are two major problems with the native risk factors module in PRA that make it impractical to use for most users:
• First, cost risk factors can only be assigned at the task level, not the resource assignment level. This means that should a task have, for example, a labour resource and a material resource, you are not able to specify that the risk factor should impact on one resource but not the other. This presents a problem for a task containing both supply and install type costs as application of a material price risk factor would also unavoidably affect labour costs, which is incorrect.
However, there are some limitations of the escalation curves functionality in PRA that users should be aware of:
• First, it is important to note that escalation curves are deterministic only, and not subject to uncertainty.
• Second, it should be noted that the effects of escalation curves are expressed only through some reporting features of PRA, but not others. Specifically, escalation will affect the outputs of the Probabilistic Cash Flow, but not the Cost Histogram graphs. This can easily result in confusion if users are not aware of this limitation.
The cash flow shown here compares four cumulative representations of capital expenditure (capex) over the project period:
• The deterministic or Early cash flow (grey curve and monthly bars)
• The P10 (optimistic) probabilistic capex curve (red)
• The Pmean probabilistic capex curve (dotted black)
• The P90 (pessimistic) probabilistic capex curve
This is a useful indicator of the main drivers of project cost, including in the example shown several risk-task costs (red bars) and a risk treatment added to the model to reduce probabilistic risk. However the cost sensitivities suffer from a couple of significant deficiencies:
• They only report costs at the task level and cannot deal with costs at the resource level
• They are unable to report accurately on driver ranking when correlation has been applied to costs and/or durations. This has already been discussed under
