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68R-11: Escalation Estimating Using Indices and Monte Carlo Simulation

68R-11: Escalation Estimating Using Indices and Monte Carlo Simulation
AACE International, May 2, 2012

Price: $0 (Member) / $100 (Non-Member)

This recommended practice (RP) of AACE International defines basic principles and methodological building blocks for estimating escalation using forecasted price or cost indices while also addressing uncertainty using Monte Carlo simulation. The methods in this RP are an extension of the principles and methods in RP 58R-10, Escalation Estimating Principles and Methods Using Indices, from a probabilistic and scenario/sensitivity viewpoint. This RP will guide practitioners in developing or selecting appropriate methods for their definitions and situation. While this RP discusses the relationships of escalation estimating to other risk cost and schedule accounts (namely contingency), dealing with those cost types is not the focus of this RP. This RP assumes that practitioners are already familiar with Monte Carlo simulation as typically applied in spreadsheet applications.

Escalation estimating is an element of both the cost estimating and risk management processes. Like other risks, escalation is amenable to mitigation, control, etc. However, this RP is focused on escalation quantification, not on treatment (i.e., how it is addressed through contracting, bidding, schedule acceleration, hedging, etc.) or control. In terms of cost estimating, this RP covers practices applicable to all classes of estimates[2]. Escalation uncertainty is partly driven by schedule risk; therefore this RP also references AACE’s RPs on integrated cost and schedule risk analysis and contingency estimating[3,4]. The examples in this RP emphasize capital cost estimating and scheduling, but the principles apply equally to operating, maintenance and other cost and time evaluations. While a model such as that covered in this RP could be used for schedule optimization in consideration of escalation, optimization is not covered here.

As with RP 58R-10, Escalation Estimating Principles and Methods Using Indices, this RP recommends segregating escalation versus exchange rate impacts and their estimation for projects with resources priced in currencies other than the base currency.

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