Construction Budget Evaluaton

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This is a presentation of a simplified model to evaluate the probability of exceedance of any project, in any industry. More complex and sophisticated, custom tailored approaches are available, but this is the simplest first approach to avoid financial fiascoes of new projects.

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Construction Budget Evaluaton

  1. 1. Evaluation of construction or implementation budgets with explicit consideration of uncertainties Simplified determination of the probability of exceeding construction/implementation budgets Riskope International SA ©, 2007-*, www.riskope.com 1
  2. 2. 700% over-cost!! “infinite” over-cost as the generally 150-300% selected structure proved over-cost useless Exceeding of budgets may arise from: • quantities’ and other uncertainties •construction/implementation hazards Riskope International SA ©, 2007-*, www.riskope.com 2
  3. 3. The application discussed herein is a subset of the Comparative Decision Analysis (CDA, © Riskope International, 2007-*) presented in the book “Improving Sustainability through Reasonable Risk & Crisis Management” by F. & C. Oboni, 2007 Riskope International SA ©, 2007-*, www.riskope.com 3
  4. 4. Example/Case study: a company has 100M$ budget available to build a facility Riskope International SA ©, 2007-*, www.riskope.com 4
  5. 5. The classic approach would be: • To design the facility (may be in several staged refinement steps) • To estimate its costs based on quantities • Evaluate contingencies (generally a lump sum amount, let’s say 15%) • Check if that estimate fits within the budget • Decide to go ahead or re-design. Riskope International SA ©, 2007-*, www.riskope.com 5
  6. 6. …and a typical result would be, for example: – Cost estimate 90M$ with possible: • 5% economy • 15% increases Riskope International SA ©, 2007-*, www.riskope.com 6
  7. 7. Which translates into the following forecasted costs: Min cost= 90-0.05*90= 85.5 M$ Average cost= 90.0 M$ Max cost= 90+0.15*90= 103.5 M$ Riskope International SA ©, 2007-*, www.riskope.com 7
  8. 8. It is very difficult to: •Take these numbers and integrate them into a coherent risk management approach because we do not know the probabilities of occurrence of those costs, and risk tolerability cannot be checked •Understand what the real variability of the project cost could be. These difficulties can be overcome by using the Riskope’s application Riskope International SA ©, 2007-*, www.riskope.com 8
  9. 9. To use the Riskope’s application a simple table of potential over-costs (+,-) is built for a pre-designed list of potential construction hazards Riskope International SA ©, 2007-*, www.riskope.com 9
  10. 10. NB: Potential over costs are entered as positive values, Potential under-costs as negative values (M$) Min (M$) Ave (M$) Max (M$) Some materials available in OR they may be in may be: abundance high demand, 21 -3 7 when needed, thus costlier thus cheaper than foreseen Some elements easier than OR more difficult of the system foreseen to to build 1 3 7 may prove: build (thus (increasing the cheaper) costs) The economy down, thus labor OR high, thus -1 6 16 may be prices will be labor prices lower will be higher Environmental good, thus no or OR bad, thus Soundness little over- generating 0 1 2 may prove to costs due to over-costs for compliance construction Riskope International SA ©, 2007-*, www.riskope.com 10
  11. 11. As soon as the values are entered, the application computes: • The probability that the budget will be overcome • The min and the max cost values • The Monte Carlo simulation, loaded with hazardous assumptions is not used! • Assumptions are of course made to keep this approach as simple as possible. Riskope International SA ©, 2007-*, www.riskope.com 11
  12. 12. In the example the result is that the probability of exceeding the initial budget of 110M$ is 22.5% approximately 1/5, i.e. a little more than getting a specific number when rolling a dice (1/6)) Riskope International SA ©, 2007-*, www.riskope.com 12
  13. 13. Translated into graphic for our example: •The budget is the blue vertical line. •The probability of exceedance of the budget is the area underneath the orange cost function to the right of the blue line. 0.16 Construction Analysis 0.14 Construction Budget ($) 0.12 0.1 0.08 0.06 0.04 0.02 0 0 20 40 60 80 100 120 140 160 As it can be seen the min and max values of the project cost cover a very wide range, but their probabilities of occurrence are negligible. Riskope International SA ©, 2007-*, www.riskope.com 13
  14. 14. Once the values are known, then the company can decide: • whether they can afford the risk to go ahead as is by comparing with their tolerability criteria, • how much money should be spent to refine the project and reduce uncertainties But more importantly: Riskope International SA ©, 2007-*, www.riskope.com 14
  15. 15. This application is the starting point for using the CDA alternative comparison system which: • Overcomes the well known NPV fallacies • Allows long term financial comparison of design alternatives • Sheds a lucid and transparent light on alternatives potential flaws. Riskope International SA ©, 2007-*, www.riskope.com 15

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