Integrated Cost and Schedule using Monte Carlo Simulation of a CPM Model - 12419
This discussion of the recommended practice (RP) 57R-09 of AACE International defines the integrated analysis of schedule and cost risk to estimate the appropriate level of cost and schedule contingency reserve on projects. The main contribution of this RP 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 risk mitigation may be conducted in a cost-effective way, scatter diagrams of time-cost pairs for developing joint targets of time and cost, and probabilistic cash flow which shows cash flow at different levels of certainty. 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 WM2012 rate risk and time-independent 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. The risk analysis described in this paper is correct only for the current plan, represented by the schedule. The project contingency reserve of time and cost that are the main results of this analysis apply if that plan is to be followed. Of course project managers have the option of re-planning and re-scheduling in the face of new facts, in part by mitigating risk. This analysis identifies the high-priority risks to cost and to schedule, which assist the project manager in planning further risk mitigation. Some project managers reject the results and argue that they cannot possibly be so late or so overrun. Those project managers may be wasting an opportunity to mitigate risk and get a more favorable outcome. (authors)