NCHRP 8-60Risk Analysis Tools and

Management Practices to Control Transportation Project Costs

Keith R. Molenaar, PhDStuart D. Anderson, PhD, PE

Transportation Estimators AssociationAnnual Conference

Saratoga Springs, New YorkOctober 4, 2008

Cost or Duration

Pro

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Cost or Duration

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Continuous Distribution:Normal

Continuous Distribution:Lognormal

Cost or Duration

Pro

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Continuous Distribution:Triangular

Cost or Duration

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Discrete Distributions

Distribution for Total Project Costs(Current $)

Mean = 499.57

5% 90% 5%

437.98 566.93

0.000

0.005

0.010

0.015

0.020

400 500 600 700

NCHRP 8-60Research Team

Keith R. MolenaarUniversity of ColoradoPrincipal Investigator

James DiekmannUniversity of Colorado

Co-principal Investigator

Cliff SchexnayderArizona State UniversityConsulting Investigator

Stuart AndersonTexas Trans. Institute

Co-principal Investigator

Ted FerragutTDC Partners, Inc.

Implementation Leader

Agenda

• Objective

• Motivation

• Process

• Methods and Tools

• Implementation

• Conclusions

Research Objective

To develop a comprehensive guidebook on risk-related analysis tools and management practices for estimating and controlling transportation project costs

Background

Risk StrategyIdentify risks, quantify their impact on cost, and take actions to mitigate the impact of risks as the project scope is developed.

Published Project Risk ManagementPolicy or Procedures47 of 52 State Agencies

Yes9%

No91%

Published Definition for Contingency48 of 52 State Agencies

Yes19%

No81%

Cost Estimate at Any Phase

Total Project Estimate = Base + Contingency

Risk-related analysis tools and management practices

Basic Framework

Assess/Analyze

Allocate

Monitor and

ControlIdentify

MitigateandPlan

Risk Management

Process

Scalable for Project Complexity

Adaptable to Project Development Phases

Risk Definitions and Tools

• Risk Identification

• Risk Assessment and Analysis

• Risk Mitigation and Planning

• Risk Communication

In a Nutshell:Risk Identification

Identification, categorization and

documentation of comprehensive, non-

overlapping set of:

– “risks” (potential problems)

– “opportunities” (potential improvements)

Events that might occur, which could change

project cost or schedule

Risk Identification - Tools

• Brainstorming

• Scenario planning

• Expert interviews

• Delphi methods

• Influence or risk diagramming

• Risk checklists

• Red flag lists

Risk Identification - Checklists

DOE

ACEC/AGC

Caltrans

WSDOT

Washington State Department of Transportation

In a Nutshell:Risk Assessment and Analysis

Process of adequately describing, assessing and analyzing the risks

– Risk frequency

– Risk severity

Results in a set of ranked risks or quantified risks for inclusion in risk register

• Qualitative Assessment Tools– Probability-Impact Matrices

• Quantitative Assessment Tools– Expected Value Methods

– Three-Point Estimate Methods

– First Order Second Moment Methods

– Monte Carlo Simulation Methods

Risk Assessment and Analysis - Tools

Probability-Impact Matrices

Near CertaintyE

Highly LikelyD

LikelyC

UnlikelyB

RemoteA

Likelihood Level

Near CertaintyE

Highly LikelyD

LikelyC

UnlikelyB

RemoteA

Likelihood Level

>10%

7-10%

5-7%

<5%

Minimal or no impact

Costand/or

Can’t achieve key team or major program milestone

Major slip in key milestone or critical path impacted

Minor slip in key milestones; not able to meet need date

Additional resources required; able to meet

Minimal or no impact

Schedule

e

d

c

b

a

Level

>10%

7-10%

5-7%

<5%

Minimal or no impact

Costand/or

Can’t achieve key team or major program milestone

Major slip in key milestone or critical path impacted

Minor slip in key milestones; not able to meet need date

Additional resources required; able to meet

Minimal or no impact

Schedule

e

d

c

b

a

Level

A

B

C

D

E

a

L

L

L

L

M

b

L

L

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c

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ML

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HM

HH

HH

A

B

C

D

E

a

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b

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HH

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ASSESSMENT GUIDE RISK ASSESSMENT

High (Red)

Unacceptable. Major disruption likely. Different approach required. Priority management attention required

Moderate (Yellow)

Some disruption. Different approach may be required. Additional management attention may be need

Low (Green)

Minimum impact. Minimum oversight needed to ensure risk remains low

Lik

eli

ho

od

Consequence

Three Point Estimate ToolsP

rob

abil

ity

C o s t

M o s t P ro b a b le C o s t (m )

L o w e s t P o ss ib le C o s t (o )

H ig h e s t C re d ib le C o s t (p )

A v e ra g e C o s t ( a lw a ys > m )

The average cost of the item is (o+4m+p)/6

Monte Carlo Simulation Models

cost

schedule

Activity A

Activity C

Activity B

Start End

4.4 4.6 4.8 5.0 5.2 5.4 5.6

1234567891011121314151617181920212223242526272829303132333435363738394041424344454647484950

Iteration

80% of the values are equal or less than 5.2

Monte Carlo Simulation Models

Risk Analysis ProcessRisk Assessment to Identify Contingency

Most LikelyEstimate

Contingency

Ranking of Risks…

79.6

78.8

68.2

67.0

41.2

36.4

32.8

29.2

29.2

23.4

20.0

18.0

15.0

14.0

13.0

10.8

10.8

10.0

7.5

7.2

6.2

5.0

5.0

5.0

3.7

3.0

642.1

0 100 200 300 400 500 600

Total Mean Cost Risk

C3. Labor shortage or material procurement issues during construction

S4.1. Other additional scope required - Bangerter

C1.2. Market conditions at time of bid

D25. Uncertainty in pavement design

C13. Additional overhead costs resulting from delays (pre-construction and construction)

D23. MVC designated as a lifeline facility

R2. Additional cost due to accelerating development within the proposed corridor

Identified Minor Risks (aggregate)

Unidentified Risks (aggregate)

S1. Uncertainty in transit component

C11. Damage to adjacent properties or facilities due to construction activity

E5. Challenge to ROD

D16. Uncertainty in required ground improvement (excluding surcharging)

S3. Additional mitigation required

S2. Additional aesthetic treatment / elements required

D18. Uncertainty in required noise walls

D2. Change alignment near ATK

D15. Other uncertainty in earthwork

C4. Difficult ground conditions during construction

R4. Other issues acquiring ROW

D12. Cannot re-use as much material as assumed

D8.1. Uncertainty in TS&L for other bridge structures - additional bridges

U8. Mt. Timpanogas - water treatment plant

S4.2. Other additional scope required - other

R1. Relocate Hillside Elementary

D14. Uncertainty in embankment consolidation

Risk Event

Contribution to Total Mean Risk (Additional Cost in 2007 $M)

0 10 20 30 40 50 60 70 80 90 100

Contribution to Total Mean Risk (% of Total)

Similar for Opportunities

Xxx

…

79.6

78.8

68.2

67.0

41.2

36.4

32.8

29.2

29.2

23.4

20.0

18.0

15.0

14.0

13.0

10.8

10.8

10.0

7.5

7.2

6.2

5.0

5.0

5.0

3.7

3.0

642.1

0 100 200 300 400 500 600

Total Mean Cost Risk

C3. Labor shortage or material procurement issues during construction

S4.1. Other additional scope required - Bangerter

C1.2. Market conditions at time of bid

D25. Uncertainty in pavement design

C13. Additional overhead costs resulting from delays (pre-construction and construction)

D23. MVC designated as a lifeline facility

R2. Additional cost due to accelerating development within the proposed corridor

Identified Minor Risks (aggregate)

Unidentified Risks (aggregate)

S1. Uncertainty in transit component

C11. Damage to adjacent properties or facilities due to construction activity

E5. Challenge to ROD

D16. Uncertainty in required ground improvement (excluding surcharging)

S3. Additional mitigation required

S2. Additional aesthetic treatment / elements required

D18. Uncertainty in required noise walls

D2. Change alignment near ATK

D15. Other uncertainty in earthwork

C4. Difficult ground conditions during construction

R4. Other issues acquiring ROW

D12. Cannot re-use as much material as assumed

D8.1. Uncertainty in TS&L for other bridge structures - additional bridges

U8. Mt. Timpanogas - water treatment plant

S4.2. Other additional scope required - other

R1. Relocate Hillside Elementary

D14. Uncertainty in embankment consolidation

Risk Event

Contribution to Total Mean Risk (Additional Cost in 2007 $M)

0 10 20 30 40 50 60 70 80 90 100

Contribution to Total Mean Risk (% of Total)

Similar for Opportunities

Xxx

In a Nutshell:Risk Mitigation and Planning

Risk Mitigation and Planning

• Assigning responsibility/ownership for

risks

• Developing plans to address risks

Assess/Analyze

Allocate

Monitor and

ControlIdentify

Mitigate and Plan

RiskManagement

Process

Risk Mitigation and Planning - Tools

• Red Flag Lists

• Risk Registers

• Risk Management Plans

• Risk Information Systems

Status ID #Date Identified Project Phase

Functional Assignment Threat/Opportunity Event SMART Column Risk Trigger Type Probability Impact

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

VH

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VH

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Pri

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PID

Impact

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Identification Qualitative Analysis

PROJECT RISK MANAGEMENT PLAN

High

Impact

Risk Matrix(12)

Pro

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Risk is occuring if the Revised Noise Study indicates the additional wall height is warranted.

Residents will want a higher soundwall than needed to mitigate noise.

The height of the proposed soundwall is 2 meters. Residents who live next to the freeway have expressed a desire for a 5 meter high wall.

Schedule

Cost

HighActive 3c

8/7/2002

Environmental Analysis

Pro

ba

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ty

Impact

Risk Registers

Type Probability ImpactProbability

(%)

Impact ($ or days)

Effect ($ or days) Strategy

Response Actions including advantages and disadvantages

Affected WBS Tasks

Responsibilty (Task Manager)

Status Interval or Milestone Check

Date, Status and Review Comments

(9) (10) (11) (14) (15) =(13)x(14) (16) (17) (18) (19) (20) (21)

VH

H X

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L

VL

VL L M H VH

VH

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VL L M H VH

VH

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VL L M H VH

Impact

Pro

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Joe Envr. Manager

Monitoring and ControlResponse StrategyQualitative Analysis

PROJECT RISK MANAGEMENT PLAN

High

Earmark $70,000 in the 6-page estimate for this risk. Add in an additional 250 hours in WBS 165 for an additional noise study to analyze 5 meter high wall at this location.

WBS 165 Perform Environmental

Studies and Prepare Draft Environmental

Document (DED)

Mitigation70% 100,000 70,000 Two Months

Impact

O P T I O N A L Quantitative Analysis

(13)Risk Matrix

(12)

Pro

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Schedule

Cost

High

Pro

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Impact

Risk Registers

RiskCommunicationTools

RiskCommunicationTools

Project Description: The I-74 corridor provides a vital link between Iowa and Illinois, and an important gateway to the Quad Cities region. Growing population and employment over the past several decades has led to increasing traffic volumes. The current configuration of roadways and bridges along I-74 does not provide consistent travel times along this major transportation corridor. Traffic incidents and maintenance activities on the narrow Mississippi River bridges impede traffic flow. Therefore, improvements to the I-74 corridor are needed to enhance the movement of persons and goods between Iowa and Illinois, and serve the transportation needs for continued economic development in the Quad Cities region.

For the Full Build Alternative, Baseline Funding Scenario, in year-of-expenditure YOE) dollars:

90% likelihood cost < $1.35 Billion 50% likelihood cost < $1.08 Billion 10% likelihood cost < $875 Million

Cost Range:

0%10%20%30%40%50%60%70%80%90%

100%

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90

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Overall Project Cost (YOE $M)

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Full Build, Baseline FundingFull Build, Funding Scenario 2Phased Full Build

Project Components and Benefits: I-74 would be reconstructed and widened

to six lanes (three lanes in each direction) from south of the 23rd Avenue interchange in Illinois to the U.S. 6 interchange in Iowa.

I-74 would be realigned in the vicinity of

the Mississippi River, and the existing Mississippi River bridge will be replaced with basket-handle configuration, and match the proposed roadway improvements.

Existing interchanges at 23rd Avenue, 7th Avenue, River Drive, State Street/Grant Street, Kimberly Road, Middle Road, U.S. 6 (Spruce Hills Road/Kimberly Road), and 53rd Street would be improved to update the design and enhance access to adjacent communities.

For the Full Build Alternative, Baseline Funding Scenario: 90% likelihood Completion before May 2023 50% likelihood Completion before Dec 2022 10% likelihood completion before Aug 2022

Completion Date Range:

0%10%20%30%40%50%60%70%80%90%

100%

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Overall Project Completion Date

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Full Build, Baseline FundingFull Build, Funding Scenario 2Phased Full Build

Note: For any given funding scenario, range in completion dates is constrained by funding availability

K ey Assumptions: The estimated cost range above includes uncertainty in the annual construction-cost inflation rate, and assumes several discrete funding scenarios.

Project Risks and Opportunities:

The main project risk is timing of full funding for the project. As shown by comparing the curves above, uncertainty in the timing of funding creates a large range in project completion dates and cost. For example, the 90th percentile cost could range over $380 million (mostly due to increased inflation costs) and the 90th percentile completion date could range over 7 ½ years.

Construction sequencing and phasing is preliminary at this stage of project development. The Full Build alternative could potentially be accelerated by up to 24 months with an increase in direct cost of about $10 million. However, an accelerated schedule could save indirect (overhead) costs and reduce inflation costs significantly.

Numerous design and right-of-way issues that need to be resolved as the project design is finalized. These could add to the project cost.

Level of Project Design:

July 2007 Low Medium High

Implementation

• A Complexity-Based Solution– Type I – Risk Identification and

Contingency Percentage

– Type II – Qualitative Risk Analysis and Identified Contingency Items

– Type III – Quantitative Risk Analysis and Contingency Management

Estimate ContingencyActions to Perform

Type II Risk Analysis

1. Red Flag Items or Rank risks (PxI matrix)

2. Choose % contingency from allowable range

Maryland Sliding-Scale Contingency

0-25%Final Design

25-35%Programming and Preliminary Design

35-40%Planning

ContingencyProject Phase

Type I - ExampleOhio DOT Design Completion Contingency

Guidelines for Cost Estimating of Major Projects

Estimate ContingencyActions to Perform

Type II Risk Analysis

1. Rank risks (PxI matrix)

2. Estimate Expected Value for top 20% of risks

3. Choose % contingency from allowable range

4. Use additional contingency if warranted by the top risks

Estimate ContingencyActions to Perform

Type III Risk Analysis

1. Rank risks (PxI matrix)

2. Develop a risk-based cost and schedule model

3. Choose appropriate contingency

Agenda

Objective

Motivation

Process

Methods and Tools

Implementation

• Conclusions

Conclusions

The simplest representations often work best

While the analysis may be supported by a complex, rigorous, and probabilistically-sophisticated model, it is of little value if it is overly complicated in their representation

http://www.fhwa.dot.gov/programadmin/contracts/cmetg.cfm

ConclusionsOther Related Initiatives

• FHWA Expert Task Group– Guide to Risk Assessment and Allocation– “Train-the-Trainer” Workshops

• NHI Course on Risk Management

• NCHRP SHRPII R-09 Guide for the Process of Managing Risk on Rapid Renewal Projects

Question, Answers and Discussion!

Thank You!

Study Help

• Examine Sliding Scale Contingency• Use Delphi Technique• Capture expert opinion• Series of questions using an Excel

Spreadsheet• Assess contingency ranges for different

project complexities and stages in project development

• Requesting your help!