Our QRA Work Process
Contingency Definition - PMBOK Guide 5th Edition:
Budget within cost baseline or performance measurement baseline that is allocated for identified risks that are accepted and for which contingent or mitigated responses are developed.
Cost Estimate Contingency - AACE, Skills and Knowledge of Cost Engineering, 6th Edition:
"An amount added to an estimate to allow for items, conditions, or events for which the state, occurrence, or effect is uncertain and that experience shows will likely result, in aggregate, in additional costs".
QRA process offers decision-makers a statistical view of the probability to overrun the Class 3 and/or 2 cost estimate through risk identification, quantification, and simulation process. The Riscor® Model is built using Monte Carlo simulation technique and following AACEi RP 41R-08 titled "RISK ANALYSIS AND CONTINGENCY DETERMINATION USING RANGE ESTIMATING" and AACEi RP 44R-08 titled "RISK ANALYSIS AND CONTINGENCY DETERMINATION USING EXPECTED VALUE" to which John Zhao is one of the contributors / reviewers in both 2003 and 2021. The Riscor® model incorporates and reflects the recent updates of relevant AACEi RPs such as RP 57R-09 (Integrated Cost and Schedule Risk Analysis Using Risk Drivers and Monte Carlo Simulation of a CPM Model).
An appropriate amount of project contingency is typically derived through a robust QRA process of which the methodology focuses on a team approach
to collectively identify key project risk drivers and assign appropriate "risk profiles - range estimation" to correlated "Specific" risky cost estimate line items of quantity, manhours, PF and costs; and
to quantify the singular, binary, and uncorrelated "Systemic" risks that have overall impacts on project objectives. The subjectivity and heuristics are normalized and optimized via Delphi Technique.
The QRA process is based on stochastic multivariate linear regression model, whose multiple probabilistic inputs are provided by relevant SMEs. The outputs include contingency amounts associated with probabilities and sensitivity analysis for top risk drivers, a.k.a. the Tornado Chart.
The QRA relies on "range estimating method" for specific risks on selected cost estimate line items and "expected value method" on identified systemic risks impacting the overall project objectives. In addition, the results of schedule risk analysis (SRA) are used as input to Riscor® Model to capture the impact of construction schedule delay. Contingency is the function of the total impacts from systemic risks, specific risks, and schedule delay. Escalation is an integral part of EAC and often is simulated using Riscor® calibrated escalation rates and commitment-based cash-flow projection in quarters.
Management Risk Reserve is often mistaken as the difference of contingency amounts between two confidence levels (i.e., P80 vs P50). Management risk reserve is deemed for "rare-event driven and residual" risks whose probability of occurrence is very low. Such risks are of binary-in-nature exogenous event-driven, and of continuous distribution residual risks with much higher consequential impacts. These "tail-end" effects need to be identified and quantified for simulation as management risk reserve fund at certain confidence level, however, this fund is not a part of project budget for FID, but a buyer-beware note.
Quantitative Risk Analysis (QRA) is a scientific approach to identify and mathematically & statistically quantify project schedule and cost estimate risks that may cause the delay of the planned project completion date, and the cost overrun of the approved project budget. Accordingly an appropriate contingency fund is added to the schedule and/or cost estimate.
Determining Contingencies for capital projects is an art and the science; it is a professional act practiced by experienced and competent Quantitative Risk Specialist with toolkits. With the knowledge of Quantified Risks, a Project Manager can make much wiser decisions based on “calculated risks”, not guesswork anymore.
By mapping project risks on critical path tasks and risky cost elements, QRA process uses the Monte Carlo (Latin Hypercube) simulation technique to:
- forecast project’s completion milestone at chosen confidences;
- quantify appropriate project contingency and binary risk impacts;
- highlight key risk drivers for the most effectively mitigation;
The QRA process further simulates
• The chance of meeting the deterministic project completion date
• The probability of not overrunning the approved cost budget
• The contingency related to construction schedule delay.
Risks without quantification are purely gut feels! - Qualifying the identified risks and Responding to them with effective risk strategy and plans are necessary steps to derive meaningful residual risk levels based on which project organization can make wise decisions.
Construction schedule delay, or relaxing project completion date, increases construction indirect costs, hence additional contingency (for extra indirect costs). Integrating schedule risk analysis (SRA) into the Cost Estimate Contingency simulation is essential part of QRA.
Quantitative Risk Analysis (QRA) starts with a live and updated project risk register, a logic-driven Level 2 or 3 project schedule in Primavera or MS Project, a detailed cost estimate matured to Class 3 or 2 classification. A brainstorming risk workshop is typically held with relevant Subject Matter of Expert (SMEs) to evaluate impacts of project-wide systemic risks and schedule / estimate specific risks on the "deterministic" schedule and estimates. Alternatively interviews with SMEs to solicit such inputs are also feasible.
Contingency is added through a simulation process, therefore no extra “padding” shall be added to the base cost estimate and schedule except stipulated "allowances". Contingency is used for
normal / minor planning & estimating variability / minor omissions
slight market-driven budgetary pricing and quotation fluctuations other than general escalation; equipment / bulk delivery time
design developments other than specified design allowances
small changes (time and cost) within the defined scope
variations in market / environmental conditions from estimate basis