Our QRA Work Process

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). 

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An appropriate amount of project contingency is typically derived through a robust QRA process of which the methodology focuses on a team approach

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• 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.

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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.