W24_HMIP_Integrated Cost & Schedule Risk Analysis using Monte Carlo Simulation of Project A Cost & Schedule in PT ABC.

1. Problem Definition

Continue from Blog W21 after choosing Project A using Monte Carlo Simulation. Project Manager of PT ABC were requested by CEO to conduct Integrated Cost & Schedule Risk Analysis of Project A in order to more comprehend of project cost and schedule risk analysis. How much contingency of time and cost needs to be provided to meet the risk threshold or certainty target of the project management or other stakeholders?

Schedule risk has typically been ignored in assessments of cost risk. More recently cost risk analyses have included attempts to represent uncertainty in time, but usually these analyses occurred outside of the framework of the project schedule. Only recently have the tools been available to include a full analysis of the impact of schedule uncertainty on the uncertainty in cost (integrated cost and schedule risk analysis) [1].

2. Identify the Feasible Alternative

The integrated cost and schedule risk analysis using Monte Carlo simulation have the following steps:

• Develop the base (free risk) project cost and schedule.
• Load resources to schedule with all cost information.
• Access and enter the risk information in the schedule model.
• Run Monte Carlo simulation and determine the cost and schedule contingency based on management’s tolerance for risk and model’s probabilistic output.

Figure 1 : Earned Value Project Management: The Process

3. Development of the outcome for Alternatives

A risk analysis of the cost estimate is conducted using the resource-loaded project schedule where the project budget (without any embedded contingency amounts) is assigned to the schedule activities they support. Then, the schedule is simulated using Monte Carlo techniques wherein:

• The time-dependent costs cost more if their activities take longer because of risks to schedule. These include labor-type resources assigned to the activities and supporting resources such as the project management team that work until the schedule is complete. These resources are often placed on hammock tasks rather than work tasks in the schedule.
• Time dependent costs may be uncertain even if the schedule is fixed since the daily “burn rate” may vary for reasons of hourly rates or uncertain resource loads.
• Time independent costs such as purchased equipment or raw materials may be uncertain but not because of time.

Using this framework the Monte Carlo simulation of resource-loaded and costed schedules will produce estimates of completion dates and costs that are internally consistent. This means that any iteration will assume the same configuration of risks (whether they occur and the degree of their impact) to calculate the dates and total project cost.

Summary of Inputs

Inputs to the analysis include:

• A high quality project schedule, whether a detailed schedule or a summary schedule that represents all of the work, is completely logically linked, does not rely on constraints or lags / leads, has resources loaded, durations are unbiased estimates, and is updated – basically a schedule following recommended practice CPM scheduling.
• A contingency‐free cost estimate, meaning that line items do not have padding built in to accommodate risk and there is no below‐the‐line contingency included.
• Good quality risk data – usually risks that have been identified during a qualitative risk analysis of the project leading to a list of prioritized risks, with probability and impact parameter data collected so that they fully represent the risks and are not biased. Other risk data might include probabilistic risk events that alter the project schedule by adding recovery activities not necessary if the risk does not occur. Without good‐quality risk data that is specific to the project being modeled, very little useful information will be derived from this exercise and the conclusions drawn may be incorrect and misleading.

Summary of Tools

The main tool of analysis is a Monte Carlo simulation of the cost‐loaded schedule. Monte Carlo simulation is standard practice in quantitative schedule and cost risk applications. Most software packages that simulate project schedules can be used to integrate cost and schedule risk in the same simulations, although some packages are more capable than others.

Other software applications may be developed in this new field of integrated risk analysis. It should be emphasized that this RP is written as the practice is developing rapidly.

Summary of Outputs

Outputs of an integrated cost‐schedule risk analysis are:

• How likely are the project plan’s cost and schedule targets to be met given the risk that may affect that plan?
• How much contingency of time and cost needs to be provided to meet the risk threshold or certainty target of the project management or other stakeholders?
• Which risks are most important to the achievement of the project schedule and cost estimate?
• Prioritization of the risk to the schedule and to the cost of the project is an important result. This is a list of prioritized risks results derived from the quantitative analysis and is therefore more accurate than the risk register list that was used as an input to the analysis.
• Risk mitigation actions can be taken based on the prioritized list of risk. These actions can be analyzed using the same risk model that produced the plan contingency reserves of time and cost.
• A unique and useful result is the finding of joint time‐cost risk results, often shown as a scatter diagram of time‐cost points calculated during the simulation showing the possibility of meeting both time and cost objectives jointly, the so‐called joint confidence level (JCL).
• Analyzing the time and cost risk together also leads to a probabilistic cash flow over time that is affected by uncertain costs and uncertain schedules.

4. Selection of Criteria

Mr B. use Monte Carlo simulation to conduct integrated cost and schedule risk analysis.

For complicated problems, Monte Carlo simulation generates random outcomes for probabilistic factors so as to imitate the randomness inherent in the original problem.

Figure 2 : Project Base Cost and Schedule

For purpose of loading resources to schedule, it is defined a term, i.e. “burn rate”. Actually, burn rate is defined as number of resources (hours, heads) applied to the task per unit time (day) [2], however for simplicity, in this blog posting, burn rate is defined as costs (US$) applied to the task per unit time (day). The burn rate (US$/day) will be multiplied by the duration (days) to compute the costs for each Project task (US$).

Figure 3 contains information of load sources based schedule.

Figure 3 : Project Load Sources Based Schedule Information

Critical Path Method Schedule :

Figure 4 : Project Network Diagram with CPM

As shown in Figure 4, the Project duration is 21 months, with the critical path is activities ADFG. Beside critical path, there are three other paths, namely ABG, ACEG and ADEG.

Assigning Risks to Activities:

Figure 5 : Project Risk Matrix

Identified risks, probability and time/cost impacts:

Figure 6 : Project Risks Probability on time and cost impacts.

5. Analysis and Comparison of the Alternatives

Mr B. use Monte Carlo simulation to compare Cost Risk, Schedule Risk and Integrated Cost & schedule Risk :

Through a risk analysis and based on historical information, range of schedule and cost for each Project task was determined, as shown on Figure 7.

Figure 7 : Project Load Sources Based Schedule Information

Figure 8 contain result of Monte Carlo simulation for cost and schedule integration risk .

Figure 8 : Range of Schedule and Cost for Project Task

Figure 9 contains comparison of integrated cost/schedule risk, schedule risk only and cost risk only.

Figure 9 : Result of Simulation for Cost and Schedule Integration Risk

6. Selection of the Preferred Alternative

First, Project Manager get Project Objectives from CEO as an Asset Manager :

Figure 10: The Strategic Asset Management Process Map

Second, Mr B. calculate a risk probability impact to duration and cost for Min, Most Likely and Max.

Third, Mr. B calculate and compare Monte Carlo Simulation Analysis using 1000 trial for Cost Risk, Schedule Risk and Integrated Cost & Schedule Risk

By using management desired probability of P90, cost contingency for Cost Risk, Schedule Risk and Cost & Schedule Risk are obtained, as shown in Figure 11.

Figure 11 : Cost Contingency

From Figure 11, we decided to use US$ 30 M as cost contingency, because it is representation of all project risks, which have impact on both cost and schedule simultaneously.

7. Performance Monitoring and the Post Evaluation of Result

It is necessary to conduct strict monitoring during implementation of the Project, to prevent the cost overrun exceed the cost contingency.

Integrating cost and schedule risk into one analysis based on the project schedule loaded with costed resources from the cost estimate provides both: (1) more accurate cost estimates than if the schedule risk were ignored or incorporated only partially, and (2) illustrates the importance of schedule risk to cost risk when the durations of activities using labor‐type (time‐dependent) resources are risky. Many activities such as detailed engineering, construction or software development are mainly conducted by people who need to be paid even if their work takes longer than scheduled. Level‐of‐effort resources, such as the project management team, are extreme examples of time‐dependent resources, since if the project duration exceeds its planned duration the cost of these resources will increase over their budgeted amount.

The integrated cost‐schedule risk analysis is based on:

• A high quality CPM schedule with logic tight enough so that it will provide the correct dates and critical paths during simulation automatically without manual intervention.
• A contingency‐free estimate of project costs that is loaded on the activities of the schedule.
• Resolves inconsistencies between cost estimate and schedule that often creep into those documents as project execution proceeds.
• Good‐quality risk data that are usually collected in risk interviews of the project team, management and others knowledgeable in the risk of the project. The risks from the risk register are used as the basis of the risk data in the risk driver method. The risk driver method is based in the fundamental principle that identifiable risks drive overall cost and schedule risk.
• A Monte Carlo simulation software program that can simulate schedule risk, burn‐rate risk and timeindependent resource risk.

The results include the standard histograms and cumulative distributions of possible cost and time results for the project. However, by simulating both cost and time simultaneously we can collect the cost‐time pairs of results and hence show the scatter diagram (“football chart”) that indicates the joint probability of finishing on time and on budget. Also, we can derive the probabilistic cash flow for comparison with the time‐phased project budget.

Finally the risks to schedule completion and to cost can be prioritized, say at the P‐80 level of confidence, to help focus the risk mitigation efforts. If the cost and schedule estimates including contingency reserves are not acceptable to the project stakeholders the project team should conduct risk mitigation workshops and studies, deciding which risk mitigation actions to take, and re‐run the Monte Carlo simulation to determine the possible improvement to the project’s objectives.

Finally, it is recommended that the contingency reserves of cost and of time, calculated at a level that represents an acceptable degree of certainty and uncertainty for the project stakeholders, be added as a resource‐loaded activity to the project schedule for strategic planning purposes.

References :

1. AACE (2011).Total Cost Management Framework: An Integrated Approach to Portfolio, Program, and Project Management. Chapter 2 Page 24.
2. AACE International (2015). Recommended Practice No. 57R‐09: Integrated Cost and Schedule Risk Analysis Using Monte Carlo Simulation of a CPM Model. Retrieved from http://www.aacei.org/avectramembers/rps/57R-09.pdf
3. Humphreys, G.C. (2011). Project Management Using Earned Value, Chapter 17, page 325 to 346, Second Edition, Humphreys & Associates, Management Consultants.
4. Wain Y.A. (2014). W22_YAW_Integrated Cost and Schedule Risk Analysis Retrieved from https://kristalaace2014.wordpress.com/2014/07/24/w22_yaw_integrated-cost-and-schedule-risk-analysis/
5. Pariangan, Wilson R. (2015). W08_WRP_Integrated Cost and Schedule Risk Analysis. Retrieved from https://garudaaace2015.wordpress.com/2015/04/20/w08_wrp_integrated-cost-and-schedule-risk-analysis/
6. Hulett, David P. & Campbell, Bill, III. (2014). Integrated Cost and Schedule Risk Analysis. Retrieved from: http://www.evmlibrary.org/library/TP-36%20Integrating%20Cost%20&%20Schedule,%20Campbell-Hulett.pdf