Download Project Risk Analysis manual and tutorials

Project Risk Analysis by Katmar Software
Version 2.1
Here you will see again that for a 95% confidence level a contingency of 5.4% is required. If you want to
work with a confidence level other than those on this summary page you can read them from the tabular
data on the Cumulative Statistics page. The box on the top right of the Main Statistics page summarises
the Averages. The Median and Mean are displayed, as well as an estimate of how close the Mean of the
simulation is to the true mean. As you run more iterations you will see that the estimate gets closer to the
true mean. You can use this as a guide to how many iterations you need to run to achieve the accuracy
you need.
If a positive skewing of the individual items in an estimate causes the Expected Cost for the project to be
greater than the sum of the individual Likely Costs, we should anticipate that if the individual items in the
estimate are negatively skewed then the Expected Cost for the overall project will be less than the sum
of the Likely Costs. This is indeed true. In the classic tradition, the demonstration of this is left as an
exercise for the reader. (Hint: See file PRA_EG03.RSK)
We have now covered almost all of the functions built into the Project Risk Analysis program. This is a
good stage for another breather before we tackle a “real” project for analysis. Before you go off for a legstretch let us just list the main points we have covered since the first breather :o
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How to read previously saved data back from the disk
The relationship between the Lowest Cost and the Low Cost for open ended distributions
The relationship between the Highest Cost and the High Cost for open ended distributions
How to edit previously entered cost information
What the Normal and LogNormal distributions look like
Reading cumulative probabilities from the “S”-curve and tabular data
How the overall risk is decreased when several items are lumped together
The Likely Cost for a project is not necessarily the sum of the Likely Costs of its elements
How to select a contingency for a desired confidence level
How to get an estimate of how accurate your simulation is
OK, go for a short walk or have a cup of coffee, and then we will attempt a typical project.
The first thing to consider in setting up an estimate in a format suitable for processing in PRA is the
number and scope of the individual items.
There are two guiding principles here. These are
independence and impact.
By independence we mean that the cost of an item can move without others automatically moving. For
example if we have 5 identical heat exchangers in a project they should not be listed separately. It is
most unlikely that the cost of one would go up while the others go down. If they were listed separately the
Monte Carlo simulation would allow the prices of the 5 items to be generated independently of each other
and you would get a false narrowing of the risk profile, along the lines indicated in Figure T2o above.
It is very difficult to obtain total independence between all combinations. For example, piping and vessels
are usually considered separately, but both would be affected if there was a shift in the basic material
price. So we have to take a practical view of independence and accept some inter-relationships.
The second principle, viz impact, means that we should not waste time trying to estimate ranges for very
small items if the maximum possible variation in the price of that item would have no discernable impact
on the overall project cost. The impact is a function of both the cost of the item and its variability. As a
rough guide, if the potential variation in the cost of an item is less than 0.3% of the total project cost it can
be lumped in with other similar items.
When broken down in this way a project will typically have between 15 and 40 line items. If you use more
than this you will run into two problems. Firstly it is unlikely that you will have so many genuinely
independent items and you will be artificially narrowing the risk profile as discussed above. Secondly you
will be wasting management resources trying to estimate cost ranges for insignificant items. In Risk
Management and Cost Control the Pareto Principle (often called the 80/20 Principle) is very important.
Look after the high impact items and deal with the rest by exception.
Part 2 - Tutorials
Page 37