(RISK.

03)
Integrated Cost and Schedule Risk
Analysis:
A Draft AACE Recommended Practice

Dr. David T. Hulett

 Author Biography
David T. Hulett, Hulett & Associates, LLC
Degree:
Ph.D.
University:
Stanford University
Years of Experience:
20+
Professional Field:
Project risk analysis and management, project scheduling

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 Purpose
The purpose of integrated analysis of schedule
and cost risk to estimate the appropriate level of
cost contingency reserve on projects
The main contribution is to include the impact of
schedule risk on cost risk and hence on the
need for cost contingency reserves
Additional benefits include the prioritizing of the
risks to cost, some of which are risks to
schedule so that cost risk mitigation may be
conducted in a cost-effective way.
 Linkage of Schedule and Cost Risk
Some resources such as labor, rented
equipment and level-of-effort support by
the project management team will cost
more if they are engaged on the project
longer than planned because activities
take longer than expected
Risks to schedule will also be risks to the
cost of these resources
 Platform / Risk Model
Resource-Loaded Schedule
The platform of this analysis is a resource-
loaded project schedule
One may use a summary schedule or a
detailed project schedule
The budget (without contingency) must be
assigned to the activities
Using resources that may be summary in
nature (e.g., construction, detailed
engineering or procurement) or detailed
 Monte Carlo Simulation
Monte Carlo simulation is the standard
approach to discovering the impact of
multiple risks on the overall project schedule
or cost risk
Simulating a resource-loaded project
schedule derives both schedule risk and the
cost risk implication in the same simulation
The results also produce a list of risks that
are prioritized through the risk model, for risk
mitigation
 Inputs
A best-practice project schedule, basically a
schedule following recommended practice CPM
scheduling. A schedule of 300 1,000 activities can
summarize and represent a large project in this
strategic analysis
A contingency-free cost estimate, meaning that line
items do not have contingency padding built in 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 are
characterized by their probability and impact ranges
 Outputs
How likely are the project plans 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 of the project
management or other stakeholders?
Which risks are most important to the achievement of
the project schedule and cost estimate?
A unique and useful result is the finding of joint time-
cost risk result joint probability distribution, often
shown as a scatter diagram of time-cost points
showing the possibility of meeting both time and cost
objectives jointly
 Best Practice CPM Schedule 1
All work needed to complete the project must
be represented in the schedule. The
schedule should relate to the WBS
There should not be any danglers. This
means that each activity needs a
predecessor to its start date and a successor
from its finish date

Predecessor Activity 101 Successor

F-S or S-S F-S or F-F
 Best Practice CPM Schedule 2
The schedule should not rely on date constraints
or fixed lags between activities
The schedule should be recently statused
The schedule should have resources costed and
assigned to activities
Summary resources are OK
The purpose of these resources is to get the costs on
the right activities, not to level resources
Sometimes we create hammocks and apply summary
resources to those

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Example of Resources Used

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 Risk Data Inputs
Risk events may or may not happen, but if they
do happen they will have a positive or negative
impact on the cost or schedule or both
Risk events probabilities are < 100%
They have uncertain impacts as well
Uncertainties include ambiguities such as
estimating error and uncertainties such as the
level of labor productivity or the price of steel.
These uncertainties are 100% likely to occur but their
impact on the project cost or schedule is uncertain

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 Collecting Risk Data
The input risk data are usually collected in
risk workshops or interviews.
In workshops the people may be influenced
by strong personalities or people in higher
positions in the organizations.
In individual interview sessions, usually
protected by promises of confidentiality,
people can discuss their concerns and make
estimates without feeling the influence of
others
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 Risk Drivers (aka Risk Factors)
The risks impacts are specified by 3-point
estimates
In Risk Drivers (Risk Factors) the impacts are ranges
of multiplicative factors. The 3-point estimate of
impact is converted to a triangular distribution
Risks are applied to activities
A schedule risk will multiply the duration of the activity
that it is assigned to
For any iteration the software selects an impact at
random from the distribution and uses that factor for
that iteration
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 Examples of Three Risk Types

Schedule duration estimate immaturity is an ambiguity. It

has 100% probability of occurring and its impact range is
both good and bad
Construction labor productivity is an uncertainty that,
compared to the assumption, could be lower or higher
The possibility of quality, key personnel unavailability is a
risk event
It may or may not occur
In this case its impact is never to the good
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 Uncertainty and Ambiguity Risks Occur
100% of the time
0010 - Construction : Duration
100% 120

240
95% 116 Schedule inaccuracy
220
90% 114

85% 113
operates 100% of the time
200
80% 111 (all iterations). On a
75% 110
construction activity of 100
180 70% 109

65% 109
days duration the results are
triangular
160
60% 108

Cumulative Frequency
55% 107
140
The construction labor
Hits

50% 106

120
45% 106 productivity risk would look
100
40% 105

35% 104
similar to this figure
80
30% 104

25% 103
60

20% 102

40 15% 101

10% 100
20
5% 99

0 0% 95
95 100 105 110 115 120
Distribution (start of interval)

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 Risk Events are Described by their
Probability and Impact
If probability is < 100%, the risk will occur in
that percentage of iterations, chosen at
random
On an iteration if the risk occurs, a factor
chosen at random from its impact range will
multiply the duration of the activities to which
it is assigned
If the risk does not occur the multiplicative
factor is 100% with no effect on duration
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 Risk Events occur with a
Probability < 100%
0010 - Construction : Duration
100% 110
Here a risk event, the possible
unavailability of quality key
95% 108

900
90% 107

85% 107 staff, occurs 70% of the time.

800
80% 106
Hence, in 30% (900) of the
75% 106

700
70% 105
3,000 iterations the original
65% 105
duration of construction, 100
600
60% 105
days, is correct. In 70%

Cumulative Frequency
55% 104

(2,100) of the iterations, the

Hits

500 50% 104

400
45% 103
duration is longer than 100
40% 103

35% 102
days as a triangle
300 30% 101

25% 100

200 20% 100

15% 100

100 10% 100

5% 100

0 0% 100
100 102 104 106 108 110
Distribution (start of interval)

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 Risk Driver Strategy
Risks are usually higher-level strategic
risks rather than tactical or technical risks
Data about risks is derived from in-depth
interviews
A risk is usually assigned to several
activities
An activity may have several risks
assigned
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 A Construction Activity with
Three Risks Assigned
0010 - Construction : Duration
100% 143

160
95% 127

150
90% 124 The interaction of the three
140 85% 122
risks produces the expected
80% 120
130

75% 118
histogram.
120
70% 117 In traditional 3-point risk
110

100
65% 115
estimating, the analyst and
60% 114

interviewees must

Cumulative Frequency
90 55% 113

approximate the result of

Hits

50% 112
80

70
45% 111
three risks on duration. The
40% 110

60
35% 109
Risk Driver analysis computes
50 30% 108 the distribution.
25% 106
40

20% 105
30

15% 103
20
10% 101

10
5% 99

0 0% 90
90 100 110 120 130 140
Distribution (start of interval)
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 Risk Drivers Avoid the Need to
Estimate the Correlation Coefficient
Activities A and B Risk #1
Correlation is
P = 50%, Factors
Calculated to be 100%
.95, 1.05, 1.15

Activity A Activity B

In the traditional approach to risk analysis, the correlation coefficient has to

be estimated.
Risk Drivers model how correlation occurs and the coefficient is a natural
result of the model

2009 Hulett & 21

Associates LLC
 Risk Factors Model How
Correlation Occurs (2)
Risk #2 Risk #1 Risk #3
P = 25%, Factors P = 50%, Factors P = 45%, Factors
.8, .95, 1.05 .95, 1.05, 1.15 1.0, 1.1, 1.2

Activities A
and B
Correlation
is Activity A Activity B
Calculated
to be 48%

Risk Drivers model correlation as it is caused in the project

based on the common (Risk # 1) and confounding (Risks # 2 and #3) risks
affecting pairs of activities
The correlation coefficient is the result, not the assumption
2009 Hulett & 22
Associates LLC
 Integrating Cost and Schedule Risk
using Risk Drivers
The risks to activity durations will affect
Durations and completion dates
Costs of labor-type resources
For each iteration the cost as well as the finish
date is calculated
Enhanced results include
Scatter diagrams (joint distributions) of time
and cost
Probabilistic cash flows by month
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 Schedule Risk applied to Activity with
Labor Resource Cost/Time Scatter
Risk ID Risk
Probability Minimum Most Likely Maximum
Labor Productivity may be
1 100% 95% 105% 120%
Uncertain
RP one-path
RP one-path Deterministic Point Inside both limits Outside both limits
Entire Plan : Cost
700 100% $660,000 51%
$660,000
95% $647,000 0% 49%
90% $642,000
600 85% $638,000
$650,000
80% $634,000
75% $631,000
500 70% $628,000
$640,000
Cumulative Frequency

65% $626,000
60% $623,000
400
55% $621,000
Hits

$630,000
Entire Plan: Cost

50% $619,000

300
Schedul 45% $617,000
40% $615,000

e Risk
$620,000
51%
35% $613,000 $619,000

200 30% $611,000

25% $609,000
$610,000
20% $606,000
100 15% $603,000
10% $600,000 $600,000
5% $596,000
0 0% $585,000
$600,000 $620,000 $640,000 $660,000 $590,000
Distribution (start of interval) 51% 10/ 09/ 2012 0%

10/08/2012 20/08/2012 30/08/2012 09/09/2012 19/09/2012 29/09/2012 09/10/2012 19/10/2012

Entire Plan: Finish

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 Effect on Cost Risk of Adding
Burn Rate Uncertainty
Duration Impacts Cost Impacts
Risk ID Risk Most Most
Probability Minimum Maximum Minimum Maximum
Likely Likely
Labor Productivity
1 100% 95% 105% 120% 95% 100% 110%
may be Uncertain
Distribution Analyzer RP one-path
Deterministic Point Inside both limits Outside both limits
RP one-path - Entire Plan - Cost RP one-path - Entire Plan - Cost
100% 51%

9% 41%
$680,000
90%

$670,000
80%

Schedul 70%
$660,000

$650,000

e Risk
C u m u la tiv e P r o b a b ility

60%
Entire Plan: Cost

$640,000

Alone Schedule, 50% $630,000

and Burn 40%

$620,000
$624,453
50%

Rate Risk 30%

$610,000

$600,000

20%
$590,000

10%
$580,000

42% 10/ 09/ 2012 8%

0%
10/08/2012 20/08/2012 30/08/2012 09/09/2012 19/09/2012 29/09/2012 09/10/2012 19/10/2012
$580,000 $590,000 $600,000 $610,000 $620,000 $630,000 $640,000 $650,000 $660,000 $670,000 $680,000
Entire Plan: Finish

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Add Uncertainty in Procurement Costs
Equipment and material costs may be
risky but not generally because their
activities durations are uncertain
Putting risk factors on material-type
resources causes the risk to be applied to
the entire cost
Schedule Impact Factors Cost Impact Factors

Risk ID Risk Probability Minimum Most Likely Maximum Minimum Most Likely Maximum
Labor Productivity
1 may be Uncertain 100% 95% 105% 120% 95% 100% 110%
Suppliers may be
2 busy 100% 100% 100% 100% 90% 105% 120%

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 Impact on Cost Risk of Adding Risk
to Material Resources
Distribution Analyzer RP one-path
Deterministic Point Inside both limits Outside both limits
RP one-path - Entire Plan - Cost RP one-path - Entire Plan - Cost RP one-path - Entire Plan - Cost
50%
100%
16% 34%

90%
$720,000

80%
$700,000

70%
$680,000
Schedule,
C u m u la tiv e P r o b a b ility
60%
Schedule
E n ti r e P l a n : C o s t
Burn Rate $660,000

Risk and Material 50%

$640,000 50%

Alone Risk 40%

$640,372

$620,000

30%

Schedule, $600,000

20%
and Burn $580,000

Rate Risk 10%

$560,000 34% 23/ 09/ 2012 16%

0% 10/08/2012 20/08/2012 30/08/2012 09/09/2012 19/09/2012 29/09/2012 09/10/2012 19/10/2012 29/10/2012 08/11/2012
$560,000 $570,000 $580,000 $590,000 $600,000 $610,000 $620,000 $630,000 $640,000 $650,000 $660,000 $670,000 $680,000 $690,000 $700,000 $710,000 $720,000 $730,000 Entire Plan: Finish
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Simple Example: Construction Project

Cost Resources Risk Factors

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We have Created and Assigned
Eight Risk Factors

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 Basic Cost and Schedule Results
AACEI Integrated Cost-Schedule Risk AACEI Integrated Cost-Schedule Risk
Entire Plan : Finish Date Entire Plan : Cost
700 100% 02-Dec-14 100% $1,008,966
95% 23-Mar-14 95% $819,295
90% 03-Feb-14 90% $792,533
600 85% 06-Jan-14 800 85% $775,498
80% 16-Dec-13 80% $760,750
75% 30-Nov-13 75% $749,866
500 70% 14-Nov-13 70% $740,066

Cumulative Frequency

Cumulative Frequency
65% 29-Oct-13 600 65% $730,838
60% 16-Oct-13 60% $721,955
400 55% 02-Oct-13 55% $713,313
Hits

Hits
50% 20-Sep-13 50% $706,146
45% 08-Sep-13 45% $699,319
300 400
40% 28-Aug-13 40% $692,139
35% 14-Aug-13 35% $683,271
30% 01-Aug-13 30% $675,521
200
25% 18-Jul-13 25% $667,247
20% 03-Jul-13 200
20% $658,705
100 15% 13-Jun-13 15% $648,572
10% 25-May-13 10% $636,168
5% 27-Apr-13 5% $619,334
0 0% 19-Dec-12 0 0% $537,199
21-Dec-12 05-May-14 $600,000 $800,000 $1,000,000
Distribution (start of interval) Distribution (start of interval)

P-80 is 16 Dec 2013, a 7-month slip P80 is $760 million, a 22% reserve

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 Joint Cost-Schedule Distribution
AACEI Integrated Cost-Schedule Risk
Deterministic Point Inside both limits Outside both limits

76%

$1,000,000 6% 17%

$950,000

$900,000 Deterministic
$850,000
Plan
Entire Plan: Cost

$800,000

$750,000 77%
$752,918

$700,000

$650,000

$600,000

$550,000 70% 03-Dec-13 7%

21-Dec-12 31-Mar-13 09-Jul-13 17-Oct-13 25-Jan-14 05-May-14 13-Aug-14 21-Nov-14

Entire Plan: Finish

Joint C/S Distribution, Cross-hairs at 70% Joint Confidence Level

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 Probabilistic Cash Flow
1,000,000

800,000

Deterministic Cost: $624,220

P-80

C u m u l a tiv e
600,000

D e te r m in is tic F in is h : 2 9 - A p r - 1 3
400,000
Deterministic Plan

200,000

0
21-Jan-11 01-May-11 09-Aug-11 17-Nov-11 25-Feb-12 04-Jun-12 12-Sep-12 21-Dec-12 31-Mar-13 09-Jul-13 17-Oct-13 25-Jan-14 05-May-14 13-Aug-14 21-Nov-14
Time

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 Prioritizing Risks To Cost
RiskstoCostinPriorityOrderattheP80
P80
ALLRISKSIN 760.8
NORISK 624.2
ContingencyReserveatP80 136.6

RisksPrioritizedforEffectonCost Some
ActivityDurationEstimatesareInaccurate 39.2 Interaction
SiteConditions/SiteAccessmaySlowLogistics 23.2 Effects are not
KeyEngineeringPersonnelmaybeUnavailable 18.4 Captured
CostEstimateisInaccurate 14.9
CapableManagementmaynotbeAssigned 13.4 Prioritize risk
EquipmentSuppliersmaybebusy 9.1 mitigations
DesignComplexitymayChallengeEngineers 3.4 using this table
EnvironmentalAgencymaybeSlow 0.1
TOTALContingencyAccountedFor 121.6
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 QUESTIONS?
David T. Hulett, Ph.D.
Hulett & Associates, LLC
Los Angeles, CA
(310) 476-7699
David.Hulett@Projectrisk.com
www.projectrisk.com

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