Project Risk Analysis Model, Schemes and Mind Maps of Risk Analysis

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Strategic Analysis and Estimating Office March 2018

Project Risk Analysis Model

User’s Guide

PRAM

Terms

Base Cost Estimate The reviewed or validated project cost estimate used in quantitative risk analysis. It

represents the expected cost if the project materializes as planned, including PE, RW,

and CN costs. It is unbiased and neutral (neither optimistic nor conservative).

Base Variability The ordinary quantity and price variations about the estimated base. It is captured as

a modest symmetric range about the estimated value, of the form: base value ±x% —

typically from ±5% to ±15% depending on level of project development and

complexity of the project.

Estimate A quantitative assessment of the likely amount or outcome. Refers to project costs,

and durations – typically preceded by a modifier (i.e. preliminary, conceptual, order-of-

magnitude, etc.). An indication of accuracy (e.g. ± x percent).

An estimate has two components: the base cost estimate component and the

risk/uncertainty component. An estimate is best expressed as a range, not a single

number.

Impact A consequence of a risk occurring in terms of cost ($) or months (mo); expressed as a

range defined by three values: minimum, maximum, and “most-likely”. A threat

impact adds cost or delay; an opportunity impact adds value or reduces cost.

Mitigation Action taken to reduce the impact or likelihood of an undesirable risk event or events.

Opportunity An event risk that has the potential to positively impact project objectives.

Probability An estimated likelihood that a particular risk event will occur. Often expressed on a

scale of 0 to 10 or 0 to 100 percent. Estimates of probability are often subjective, as

the combination of tasks, people and circumstance varies among projects.

Qualitative assessment

An assessment of risk relating to the qualities and subjective elements of the risk —

those that cannot be quantified accurately. Qualitative techniques include the

identification of risk, recording risk details and relationships, categorization and

prioritization of risk relative to each other.

Quantitative Analysis Modeling of numerical outcomes by combining actual or estimated values with an

assumed or known relationship between values, using arithmetic or statistical

techniques, to determine a range of likely outcomes of a variable or to understand

how variance in one or more values is likely to affect others.

Risk Effect of uncertainty on objectives.

Risk Events Uncertain events that affect the project resulting in impacts to cost, schedule, safety,

performance or other characteristic but do not include the minor variance inherent in

Base Costs.

Risk Register The risk register serves as a repository for identified project risks. The risk register

includes detailed information about the risk and is a “living” document that evolves as

the project evolves.

Risk Response The process of developing response actions to identified risk events that enhance

opportunities and reduce threats to project objectives.

Threat An event risk that has the potential to negatively impact project objectives.

Uncertainty The lack of knowledge of the outcome for a particular element or value.

YOE Year Of Expenditure. The estimated year that money will be spent to complete project

work elements.

Base costs reported to program management shall be in current-year dollars (the un-

inflated estimate).

Additional terms for Risk Management may be found in the WSDOT Glossary for Cost Risk Estimating Management

Project Risk Analysis Model: Overview

A Risk model simulates events that may occur in the real world. For project risk analysis, attention is focused on events that can affect project objectives such as cost and schedule.

The Project Risk Analysis Model (PRAM) uses Monte Carlo simulation to generate cost and schedule probability distributions from user input cost, schedule, risk and uncertainty information. It produces quantitative risk analysis outputs that provide actionable information to project managers and teams.

The model runs thousands of simulations or “project realizations” that virtually execute the project under the influence of all input uncertainties and risks. For each realization some risks occur, some do not; some impacts are high and others are low. The output provides an estimated range of project cost and schedule outcomes. Few realizations reach the extreme limits of the distribution, most aggregate toward the middle.

Up to 24 individual risks may be entered into the model. The outputs present statistical summaries, graphically as a distribution histogram, a cumulative distribution function S-curve, and as a percentile table. The model reports cost distribution forecasts for Preliminary Engineering (PE), Right of Way (RW), and Construction (CN) as well as total project cost. Results are provided in Current Year (CY) dollars and as inflated to Year of Expenditure (YOE) dollars. There are two schedule distribution forecasts, contract advertisement date and end of construction date. There are also tornado diagrams, sorting risks by expected value (EV), by cost and schedule impact.

The model accommodates two analyses. The first is for analyzing project estimate exposure to risks as initially identified and assessed, and the second is for analyzing the response to those risks. Comparing the pre-mitigated and post mitigated results offers users a quantified measure of the value added by proactive project risk management. The Base Estimate and Risk input forms serve both analyses. Color-coding is used throughout the model to promote instant recognition of which analysis inputs or results are which:

ORANGE = Risk Analysis (pre risk-response: pre-mitigated risk analysis) BLUE = Risk-Response Analysis (post risk-response: post mitigated risk analysis)

Two-in-One

The following illustration shows the two analyses available in the model, how they are color- coded, and how single input sheets are used for each:

Workbook Sheets

The PRAM workbook contains sheets for data input and for output reports of simulation results. These sheets serve to record the Risk Analysis — pre risk-response — and the Risk-Response Analysis entries and results. The respective zones are clearly labeled and color-coded.

Inputs

BASE Estimate (Sheet: Base) Users enter the expected cost as if the project goes as planned. The BASE Cost is an unbiased neutral estimate of cost and schedule; care should be taken that information entered is neither conservative nor optimistic. The BASE estimate captures the total estimated project costs including, preliminary engineering, right-of-way, construction, Mobilization, Construction Engineering, Tax, Change Order Contingency, and below the line items (700/800 items). (WSDOT standard construction contingency amount is based upon historical usage). The upper portion is for the initial Project Risk Analysis. The lower portion accounts for any base estimate adjustments due to risk response strategies — the Risk Response Analysis.

Values are entered in Current Year (CY) dollars.

RISK (Sheets: identifications vary) The simulation handles up to 24 discrete risks. Each Risk sheet records an identified risk associated with the project under study: the phase it affects, its details, probability and quantified consequences. The upper portion of the form is about the risk as it is first identified, with no regard to doing anything about it, i.e., before any response strategy — pre risk-response values, or pre-mitigated risk. The lower portion details the proposed response strategy with any expected change to likelihood or impact due to implementing the strategy — the post risk-response values, or Post-mitigated Risk.

Project risks can pose a Threat of negative impacts to project objectives, or present an Opportunity that has a positive impact.

Model Input Tables: Inter-Risk Conditionality / Model Input Synopsis

RMP (Risks ordered 1 – 12) & RMPSuppl (Risks ordered 13 – 24) Data entered in the individual forms for Risk Analysis (pre risk- response) appear in these tables. The first twelve risks (1 – 12), in the same order as workbook sheet tabs, are in one, the second twelve (13 – 24), are in the other. At the top of each table is a summary of (pre risk-response) Base Estimate inputs.

This is where to Indicate conditionality between risks, to model basic correlations, dependencies, and duration links. See later section for more details.

The model-engine uses the inputs from these sheets. Review the inputs before running.

Base Estimate Pre Risk- Response

Post Risk- Response

Base

Risk B Risk C

Risk Form Pre Response

Post Response

Risk A

RMP RMPSuppl

Model Input Tables RUN

$↗ $↗

RMPM (Risks ordered 1 – 12) & RMPSupplM (Risks ordered 12 – 24) Data entered in the individual forms for Risk-Response Analysis appear in these tables. The first twelve risks (1 – 12), in the same order as workbook sheet tabs, are in one, and the second twelve (13 – 24), are in the other. At the top of each table is a summary of (post risk-response) Base Estimate inputs.

Revise or indicate conditionality between risks accordingly, to reflect the effects of response strategies (more detail provided later in this guide).

Review the model inputs here before running.

Outputs

Expected Value (sheet: EV) Graphs on this sheet sort entered risks by Expected Value (EV) as an aid for optimizing the risk-response effort. Typically, risks at the top warrant the most attention, with a diminishing rate of return on effort as we descend on the diagram. Limited risk management resources should be applied proportional to a risks likelihood and impact. To that end, expected value combines factors to one convenient, probability-weighted number. When using, however, be aware that this calculation could de-emphasize a high impact risk that has low probability. Project Managers are advised to look for these events (known as “Black Swans”), and give them due attention.

There are four diagrams in the sheet. The top two show pre risk-response ranking, one for cost and another for schedule. The bottom two are for after risk-response adjustments. The simulation need not run before viewing the Expected Value summary. This diagram is available as soon as all risks have been entered/quantified. “Click” the launch button on the sheet after risk entry; “click” to update after any risk entry revision. Do the same after recording risk- response values to note any changes in standing.

The expected value of individual random variables is the probability-weighted average of input values.

݊݅݉൬ ൈ ݕݐ݈ܾܾ݅݅ܽ݋ݎ ܲൌ ݁ݑ ݈ܸܽ ݀݁ݐܿ݁݌ݔܧ

RMPM RMPSupplM

Model Input Tables RUN

$↗ $↗

Expected

Value

EV

Using the PRAM: Basic Steps

Before Using

The correct application of the Project Risk Analysis Model assumes familiarity with basic risk management theory and technique. Please review WSDOT’s Project Risk Management Guide before using the model:

http://www.wsdot.wa.gov/publications/fulltext/cevp/ProjectRiskManagement.pdf

Get the Workbook

The Project Risk Analysis Model workbook is available online here:

http://www.wsdot.wa.gov/publications/fulltext/CEVP/PRAM.xlsm

Open the Workbook / Table of Contents / Navigation

The Project Risk Analysis Model workbook should open at the Table of Contents (TOC) sheet.

Table of Contents

Base Estimate Base Risk Template R‐ Risks Ordered 1 – 12 Risks Ordered 13 – 24 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Risk Tables Pre‐Response RMP^ Pre‐Response RMPSuppl Post‐Response RMPM Post‐Response RMPSupplM

Expected Value Cost $ PE‐Cost (CY) (^) Preliminary Engineering PE‐Cost (YOE) ROW‐Cost (CY) Right of Way ROW‐Cost (YOE) CN‐Cost (CY) (^) Construction CN‐Cost (YOE) Total‐Cost (CY) Total Total‐Cost (YOE) Dates ⌛ Contract Advertisement Ad Date End of Construction End CN

Risk Breakdown Structure (^) RBS User's Guide (^) Users Guide

Current Year Year of Expenditure

Risks Ordered 1 – 12 Risks Ordered 13 – 24

EV

Inputs

Outputs

Appendix

This area is empty when a new workbook is first opened.

As Risk Sheets are added, they are listed here with tab-links. (^) After risks are added

From the Model Input Tables, along the left edge of the table, notice that for each risk entry there are two tab-links. The upper one goes to the risk sheet, the lower one goes to the Table of Contents.

All of these navigational shortcuts have some advantage over the traditional sheet selection-by bottom-tab. There are over 40 sheets to negotiate in a model fully loaded with project risk sheets (up to 24 risks). Getting from one sheet to another can be difficult when limited to scrolling and selecting from a wide array of bottom sheet tabs.

Reordering Risk Sheets

Risks may be entered in any order, but later it may be desired or necessary to change the sequence as they list in the Table of Contents and/or in the Model Input Tables. For purposes of modeling inter-risk conditionality (see later section) the sequence of risk entries is crucial; but even for purely esthetic reasons, reordering risks is a simple matter of dragging their respective tabs (at bottom) to the required sequence.

Be careful when reordering tabs in a workbook that already has inputs for inter-risk conditionality.

Entering Data

There are two parts to each input worksheet. The first records the values required for a Risk Analysis (pre risk-response) simulation. The second is for Risk-Response Analysis, to model the effect of response strategies. Combining these in one workbook allows for ready comparison and quantification of the value added by active risk management.

Data may be entered live during a workshop, before, or sometime after active or collaborative risk assessment. It may be copied-in from a list, from separate sheets, imported, or received from remote collaborators, etc. Risk response strategizing may lag the risk analysis, or it may take place on the heels of initial risk elicitation and assessment. Data for each analysis, pre or post response, does not need to be entered in a particular sequence, but care must be taken to assure that it is complete for an analysis, and that it is entered in the right section.

The user may reorder risk sheets by dragging their respective sheet tabs, but conditionality indicators will not automatically update to suit a new order. Any that were set before a reordering should be checked afterwards to ensure risks are still connected as intended.

For the purpose of orderly presentation in this guide, we will assume a workflow where Risk Analysis data is entered first, then we will return to make Risk Response Analysis entries. This guide follows the diagram Using the PRAM: Basic Steps.

Base Estimate

Go to the Base sheet.

Enter data in the fields of the upper portion of the sheet, for Risk Analysis (with Pre-mitigated Risks). The orange outlined boxes are critical for the model to calculate results. Leave blank when there is no associated value.

Do not enter zero”0” in the entry fields.

Important, but less critical for modeling, are the lighter-outlined boxes. Hatched fields are for a more complex analysis — see the section, Non-WSDOT Inflation Rates, for more information. Underlined fields are calculated values or information referenced from elsewhere and are auto-filled.

Make cost entries in million dollar units, and durations in months.

NOTE: Values are displayed in “Millions of dollars” ($M) and “Months” (mo). Less than a million dollars or less than a month is entered as a decimal. Examples:

$200,000 enter as .2 it is displayed as 0.20 $M 1 week enter as .25 it is displayed as 0.3 mo $2,689,123 enter as 2.69 it is displayed as 2.69 $M 3 months and three weeks enter as 3.75 displayed as 3.8 mo $23,000 enter as .023 it is displayed as 0.02 $M one and a half years enter as 18 it is displayed as 18.0 mo

The next section is for Base Estimate Cost values:

• Base Estimate: Enter base cost for each project phase: Preliminary Engineering (PE), Right of Way (RW), and Construction (CN). Do not include ANY misc. allowances in these. The construction figure should already reflect the cost of all Bid Items, Mobilization, Sales Tax, Change Order Contingency, Construction Engineering, 700 & 800 Level Items, etc. — the Total Cost to Complete minus RW & PE costs.
• Spent to Date Project dollars already spent may be accounted for in this column.
• Non-WSDOT Inflation Rates By default, the model refers to an internal inflation rate table developed by a third party. The user may opt-out of the table by entering an inflation rate that better suits conditions.
• Market Conditions : Enter percentages that reflect characteristics or trends in the market. Cost and availability of labor and materials, or the number of contractors available to bid the work, will all effect the market conditions. Values reflect the opinion of the project team, an assessment of the bidding environment. Enter a Probability for Favorable: (likelihood of better than planned) and Unfavorable: (likelihood of worse than planned). Enter a percentage of construction cost representing the Impact of how much better, or worse the project cost might be due to market conditions, primarily the bidding environment.

COST $ Base Estimate Non‐WSDOT Inflation Rates Market Conditions Millions ($M) (^) Spent to Date ↓ ↓ PE: PE: Favorable: ← → Unfavorable:

Right of Way: RW: RW: Inflation Points ← → Pre‐construction (PE & ROW): Construction: Construction: CN: CN: ← → Risk Markups Mobilization: Minimum Maximum Sales Tax: Preliminary Engineering: ↗ Estimated Total Cost to Complete Range* (^) Construction Engineering: Change Order Contingency: ← EsƟmated Total Project Cost Range* *Extremes — not including risk impacts, market conditions, nor inflation.

Preliminary Engineering:

Probability Impact

Variability

Variability (^) 50%

Total Spent ← to Date

Variability

Cost and Schedule Variability : Below each project phase cost and schedule estimate is an input for inherent variability — not caused by risk events. Base variability captures a modest symmetric range (of the form: base value ± x%) about the estimated value, typically from 5% to 15% depending on level of project development and complexity. Cost variability represents quantity and price variations about the estimated base.

• Inflation Points : 50% by default; this directs the model to inflate costs to the midpoint of each phase duration, i.e. 0.5. Inflation point fields are provided for Pre-Construction (Preliminary Engineering and Right of Way acquisition) and Construction activities. Please contact the Strategic Analysis and Estimating office (SAEO) for assistance.
• Risk Markups : These are applied to the risk cost impact result per simulation. Values are typically the same as those used in calculating the construction base cost estimate. Enter Project Markup percentages for: → Mobilization → Local Sales Tax Rate → Construction Engineering → Preliminary Engineering — this is a calculated field, assuming the user expects the same ratio as entered for estimated PE/CN for any simulated total risk cost impact (users may override if desired). → Change Order Contingency

The next section is for Base Schedule values:

• Target AD Date, Enter the planned Advertisement Date of the project.
• Ad/Bid/Award (A/B/A) Duration, Enter how many months from the AD date until it is awarded.
• Estimated Construction Duration, Enter how many months the project will be in Construction.

Risks: Qualitative Translations — informational (no entries required, advanced feature) This section shows and controls how the model translates risk probability and impact (quantitative) values into qualitative terms relative to base estimate entries. This governs the Heat Map display in each risks Qualitative Rendition section. In reverse, it serves as an aid in quantifying risk probability and impact when starting from qualifying terms like “High”, “Very Low”, etc.

SCHEDULE ⌛

months (mo) Preliminary Engineering RW Acquisition Target Ad Date

(For Inflation) (^) ← → ← →

*Minimum → *Maximum →

Pre‐construction (Pre‐CN) Construction (CN)

End of Variability Variability Construction

Estimate Date

A/B/A

Duration

Estimated Start Date Construction Duration 01‐00‐00 01‐00‐

*Extremes — not including risk impacts.

0.0 mo 01‐00‐00 01‐00‐00 0.0 mo 01‐00‐ 0.0 mo 01‐00‐00 01‐00‐00 0.0 mo 01‐00‐

RISKS Qualitative Translations Probability ↓ Impact →^ PE $ RW $ CN $ Pre‐CN ⌛ CN ⌛ Base $ → Base ⌛^ → Very High ≥ > > Very High High ≥ > > High

0.00 $M 0.00 $M 0.00 $M 0.0 mo 0.0 mo 0.0 mo 60% 5 0% 0.000 $M 0.000 $M 0.000 $M 20% 0.0 mo 0.0 mo

80% 10.0% 0.000 $M 0.000 $M 0.000 $M 30%

When adding more risks later, after previous forms have been filled-out, always start by making a copy of a blank template “R-0”. This prevents unintentionally using values from a pre-existing (copied) risk form.

Now go back to tab “R-0 (2)”. Enter risk analysis (pre risk-response) values in the upper portion of the Risk Form. Notice that critical entries for simulation are in solid, black or orange outlined boxes. Important, but less critical for modeling, are the lighter- outlined boxes. Hatched fields are for a more complex analysis — see the section on Conditionality for more information. Underlined fields are calculated values or information referenced from elsewhere and are auto-filled.

The top portion is for risk identification information and is common to both pre and post mitigated risk analyses.

The title of the project is automatically copied from the Base Estimate form.

Date: Enter date the risk was identified and assessed.

Risk ID: (auto-filled) copies what you enter as the tab name. Recommendation — use a Risk Breakdown Structure (RBS) code as a Risk ID / tab name. Build one by first selecting a general Category, then pick a specific from the drop-down in the upper-right form-corner. The result will appear in the RBS Code field. Change the decimal place if the ID is the same as a previously entered risk. Enter this unique ID as the tab-name for this sheet/risk. (See later section for more details about RBS).

Risk ID examples:

Category: (drop-down) Select from among the following:

Risk Form (^) Date:

Category: RBS Code: MDL Code: Risk Title: Status: Phase that it Impacts: Critical Path? Detailed Description of Risk Event: (SMART―Speci fic, Mea s ura bl e, AƩributa bl e, Releva nt, Timebound)

Trigger:

Example Project Risk ID: R‐0 (2) (^). ENV 30 Environmental Permitting (incl Appeals)

Yes

= critical for proper model results = risk information = for complex analysis = calculated or referenced field

FORM ENTRY LEGEND

Environmental / Hydraulics Structures / Geotech Design / PS&E Right-of-Way Utilities Railroad Partnerships / Stakeholders Management / Funding Contracting / Procurement Construction Enterprise Risk

After choosing a category, specify by selecting a subcategory from the drop-down in the upper-right corner of the sheet. Example (Right-of-Way):

RBS Code: (auto-filled) See Risk ID: above. This is auto-filled, but it may be over-written.

MDL Code: (optional) is the Master Deliverable List ID.

Risk Title: Summary Description. Enter a concise descriptive title for the risk.

Status: (drop-down) marks a change of the risks potential in relation to project progress. Select:

Active – The risk is included in the simulation; it should get a response; it should be monitored and controlled.

Dormant – Low priority risk; is excluded from the simulation; could become active in the future if conditions change.

Retired – The risk is excluded from the simulation; it is no longer relevant; it poses no real threat (or opportunity) to the project.

Phase that it Impacts: (drop-down) select the phase which the risk is likely to affect:

Pre-construction ROW Construction

Critical Path? (drop-down) The default is “Yes”. Select Yes or No to indicate whether or not this risk affects an activity that has impact on the critical path of the project schedule.

Detailed Description of Risk Event: Concisely describe the risk with enough detail so that its nature is clear to later readers. Description of risks are: Specific, Measurable, Attributable, Relevant, and Time-bound (SMART). The note fields at the bottom half of the worksheet can be used for additional details.

Trigger: Enter a brief description of any event that must occur to initiate the risk’s potential.