Live Chat ×
Skip to main content

(RISK-2694) An Innovative Approach to Escalation Risk Mitigation

Level: Intermediate
Author(s): Warren Fletcher
Venue: 2017 AACE International Annual Meeting, Orlando, FL

Abstract: The potential for project proponents to use inappropriate escalation rates represents a significant risk to any organization assessing projects for funding from a limited capital pool. This is the case for the Australian Department of Infrastructure and Regional Development, which assesses project proposals, many with long delivery timeframes, from each state and territory, and subsequently manages, on behalf of the Australian Government, funding for approved major infrastructure projects. This paper describes the Department’s innovative approach to escalation risk mitigation, and the associated policies that will be reflected in the Department’s suite of cost estimation guidance. The approach utilizes specialist economic forecasters, informed by experienced cost estimators, to develop a range of road infrastructure project composite quarterly index series from which annual historical and forecast escalation rates specific to each state and territory are derived. The paper will explain how these composite index series draw on forecasts and actuals for accessible subordinate index series relating to key project cost drivers and how consistency of application is achieved via a robust escalation calculation tool that proponents populate.