42R-08: Risk Analysis and Contingency Determination Using Parametric Estimating

42R-08: Risk Analysis and Contingency Determination Using Parametric Estimating
AACE International, May 26, 2011

Price: $0 (Member) / $50 (Non-Member)

This recommended practice (RP) of AACE International (AACE) defines general practices and considerations for risk analysis and estimating cost and schedule contingency using parametric methods. Parametric methods are commonly associated with estimating cost based on design parameters (e.g., capacity, weight, etc.) or time duration based on costs; in this case, the method is used to estimate contingency based on risk parameters (e.g. level of scope definition, process complexity, etc.). This RP includes practices for developing the parametric methods and models (generally empirically-based). Recommended practice 43R-08 provides example process industry parametric models (including software).

This RP is intended to provide guidelines (i.e., not a standard) for contingency estimating that most practitioners would consider to be good practices that can be relied on and that they would recommend be considered for use where applicable. There is a range of useful contingency estimating methodologies; this RP will help guide practitioners in developing or selecting appropriate quantification methods for their situation. This RP does not address management of contingency once it is determined.
While this RP is relatively short, it incorporates a lot of information by reference and it addresses a complex research and empirically based methodology. It is highly recommended that the reader understands the research behind this method to avoid significant misunderstanding of risks and misstatements of contingency.

This RP is based on over 40 years of research, development, and practice. The development and use of parametric risk analysis and contingency estimating methods evolved in parallel with industry’s recognition that poor project scope definition was often the greatest project cost and schedule risk driver. This recognition led to the development of project scope development processes (e.g., phase-gate processes) and scope definition maturity matrices such as those included in AACE’s recommended practice for cost estimate and schedule classification.

Before the above were accepted as best practices, experts first had to prove their value to project outcomes. They did this by studying actual projects and developing empirically-based parametric models that showed how poor scope definition resulted in greater cost growth and wider accuracy ranges. A paper by Hollmann surveys these parametric developments regarding costs and highlights the pioneering work of the late John Hackney, followed by Edward Merrow, et al. at the RAND Institute, and Steven Trost, et al. for the Construction Industry Institute (CII). A paper by Baccarini also provides an extensive survey of these methods. Work by Myers, et al. at RAND and Lee et al. at CII extent the research to schedule, These and the other sources referenced in this RP are recommended reading for parametric method practitioners.

It is AACE’s recommended practice that whenever the term “risk” is used, that the term’s meaning be clearly defined for the purposes at hand. The method in this RP quantifies the impact of uncertainty, i.e. "risks + opportunities".
It is AACE’s recommended practice that whenever the term “risk” is used, that the term’s meaning be clearly defined for the purposes at hand. In range estimating practice as described in this RP, risk means "an undesirable potential outcome and/or its probability of occurrence", i.e. ""downside uncertainty (a.k.a. Threats)." Opportunity, on the other hand is "a desirable potential outcome and/or its probability of occurrence", i.e, "upside uncertainty." The range estimating process for risk analysis quantifies the impact of uncertainty, i.e. "risks + opportunities.

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