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(RISK-3037) Combining Parametric and CPM-Based Integrated Cost-Schedule Risk Analysis

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Venue: 2019 AACE International Conference & Expo, June 16-19, 2019, New Orleans, LA, USA

Abstract: Parametric modelling (“P”) of systemic risk plus expected value (EV) modelling of project specific risks to quantify project contingency is described in detail by John K Hollmann in his book “Project Risk Quantification” which highlights the value of empiricism to forecast project cost and schedule outcomes, consistent with AACE RP 40R-08. Hollmann recommends the combined P+EV methodology as reliable, easy to perform and not requiring the use of Critical Path Method (CPM). However, the assessment of schedule risk is not straightforward without use of a CPM schedule.

CPM-based Integrated Cost-Schedule Risk Analysis (ICSRA), described in RP 57R-09, represents the most common approach recognised by AACE used to quantify contingencies. Even more common in practice are CPM-based non-integrated methods using schedule risk analysis (SRA) feeding into separate cost risk analysis (CRA).

All of these CPM-based variants can only refer to past project performance through expert opinions and they are criticised for failing to forecast adequate cost contingency. But when practised carefully using good quality schedules, ICSRA is a good predictor of schedule contingency and enables schedule risk and thus time-dependent cost risk optimisation.

Combining parametric modelling of systemic risk with CPM-based ICSRA is considered invalid because the parametric forecasting covers all project risk except major project specific risk events. This paper describes a valid method of combining P+ICSRA, to optimise schedule risk and forecast realistic cost contingency. It describes experience implementing this methodology.