Project Risk Quantification by John K. Hollmann

A Practitioner's Guide to Realistic Cost and Schedule Risk Management

John has scheduled a 1-1/2 day PRQ seminar at the AACE annual meeting in Orlando, June 10-11: AACE link.

Project Risk Quantification presents the most practical, realistic, and integrated approach to project cost and schedule Risk Quantification that is available today! It offers proven, empirically-valid methods and tools applicable to projects of all types and at all decision gates. The text is written for both the manager and the risk analysis practitioner. It will bring reliable accuracy and contingency determination to your capital project organization.

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ISBN: 1-941075-02-9. ISBN-13: 978-1-941075-02-9. Published June, 2016. Total pages: 416.

Project Risk Quantification

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From the Publisher...

When John contacted us to explore publishing his manuscript, we were immediately interested. I have some experience in the area of cost and schedule risk, including co-authoring a paper with my former colleague Jack Bess (Chevron), which we presented at a DAAG conference. I also facilitated Jack’s workshops on several occasions.

I also had extensively and carefully studied Rand’s work (which was led by Ed Merrow) on project performance in the mid 1980’s while working as a Research Supervisor at the Savannah River Lab (now SRNL). The DOE-funded Rand reports are timeless and are still on my bookshelf. John draws heavily on this work and his experience working at IPA. I was able later to meet and talk with Ed at one of the Chevron CPDEP Forum sessions a few years ago and express my appreciation of his work.

To be honest, I wish I had been able to read John’s book thirty years ago! The concepts that he lays out so clearly in this book are things I had to learn the hard way, by trial and error. Every engineer involved in any kind of manufacturing, process, and/or project work needs to read this book, which goes far beyond risk quantifi cation. This book will help you improve the way you approach, implement, fund, and manage projects. It can also serve as a primer to help project engineers understand how projects are developed, planned, and implmented and the myriad of ways that projects can go wrong.

Reviews

About the Cover

John originally picked out a very nice graphic of Janus that was on the cover of Barron's magazine. Both John and I contacted Barron's to get permission to use the image, but there was no response. So we commissioned my oldest daughter, Haesel, to do a cover drawing. She used a technique called "Scratchboard," which, according to Wikipedia.com, "refers to both a medium, and an illustrative technique using sharp knives and tools for etching into a thin layer of white China clay that is coated with black India ink..." She then inked the board.To the right is an earlier version of the drawing without the ink completed.

Meanwhile our granddaughter Violette (age 14), inspired by watching her mom work, got on the computer and did her own version of Janus, which is shown below. If John writes an execuitve summary risk quantification book (we call a nominal 150-200 page book an "airplane book" as you can easily read it on an airplane trip), we can use Violette's version for that book!

Project Risk Quantification


Project Risk Quantification

From Project Risk Quantification, Table of Contents


Part 1: Understanding Risk Quantification in a Capital Project System
1 Introduction: Why Risks are Poorly Quantified. ...................................... 1
2 Risk – God of the Gate; Creator and Destroyer of Value. ............................. 9
    Who Should Read This Book? ..................................................... 11
    What is Risk? .................................................................. 14
    What Is Risk Quantification? (It is More Than Contingency) ..................... 16
    Why Focus on Risk Quantifi cation? ............................................. 18
    Myths, Misdemeanors, and Felonies .............................................. 20
    The Organization of This Book .................................................. 23
3 Phase Gate Capital Project Systems. ................................................ 25
    Systems ........................................................................ 28
    Project Management and Systems Evolution in the Process Industries ............. 29
    Scope Definition and FEL ....................................................... 32
    System and Process Maturity and Quality ........................................ 35
    Scope Definition Metrics ....................................................... 37
    Scope Definition: Driver of Cost Growth and Schedule Slip ...................... 42
4 Accuracy: Confi dence and Credibility. ............................................. 51
    Accuracy Range: Expectation versus Reality ..................................... 53
    Large versus Small Projects .................................................... 58
    Megaprojects versus Merely Large Projects ...................................... 60
    Complexity and the Disorder Dichotomy .......................................... 61
    Programs and Portfolios ........................................................ 65
    The Cost of Time and Money (Escalation, Exchange, Interest) .................... 66
    Opportunity as Threat .......................................................... 69
    Dealing with Reality ........................................................... 71
5 Investment Decision Making at the Gate. ............................................ 75
    Decision Making and Decision Analysis .......................................... 77
    Decision Models and Applied Risk Quantification ................................ 80
    The Story ...................................................................... 87
    Gate Keepers, Stakeholders, and Behaviors ...................................... 88
6 Budgeting for Risk. ................................................................ 99
    Project Control Explained ..................................................... 100
    Estimating and Scheduling Strategy Defines the Base............................ 105
    Allowances (Uncertainties Included in the Base) ............................... 107
    Contingency ................................................................... 108
    Escalation .................................................................... 114
    Exchange Rate ................................................................. 115
    Management Reserves and Authority ............................................. 116
7 Introduction to Risk Quantification Methods. ....................................... 121
    Risk Quantifi cation First Principles: What is a Good Method? ................. 122
    Good Judgment: You Can’t Live Without It ...................................... 124
    Recommended Risk Quantification Methods........................................ 125
    Method Extensions ............................................................. 131
    Overall Risk Quantifi cation Methodology ...................................... 134
    Alternative Methods: Recommended (and Otherwise) .............................. 135
8 Organizing for Risk Quantification. ................................................ 141
    Competencies, Resources, and Organization for Risk Quantifi cation ............ 141
    Examples of Successful Approaches ............................................. 150

Part 2: Risk Quantification Methods and Application 9 Base Cost Estimating and Scheduling. ............................................... 155 Base Cost Estimating .......................................................... 158 Base Planning and Scheduling .................................................. 162 Sources and Measurements of Uncertainty or Variability in the Base Methods .... 166 Quality of Estimating Practices and Data ...................................... 170 Quality of Scheduling Practices and Data ...................................... 175 Review and Validation: Assessing Quality and Bias ............................. 176 10 Statistics and Models. ............................................................. 185 Statistics Basics ............................................................. 186 Descriptive Statistics ........................................................ 188 Inferential Statistics: Multiple Linear Regression Models ..................... 196 Inferential Statistics: Monte Carlo Simulation Models ......................... 204 Aligning Risk Types with the Risk Models ...................................... 208 11 Systemic Risks and the Parametric Method. ......................................... 213 Start with the John Hackney and Rand Corporation Models ....................... 214 Implementing Customized Parametric Models ..................................... 221 Case Example of Model Implementation .......................................... 232 Applying the Parametric Models ................................................ 235 Early Definition and Start-up Systemic Risks .................................. 240 Considering Programs and Integrative Systemic Risks ........................... 245 12 Project Specific Risks and the Expected Value Method. ............................. 249 Start with the Standard Risk Model ............................................ 250 Considering Practicality and Realism .......................................... 252 Applying the Expected Value Method ............................................ 255 The Risk Quantification Workshop .............................................. 261 Considering Programs .......................................................... 264 13 Probabilistic Escalation and Currency Exchange. ................................... 267 Escalation and Exchange Base Estimating ....................................... 268 Probabilistic Approaches ...................................................... 273 Combining All CAPEX Risks – Universal CAPEX Risk Quantifi cation .............. 276 Obtaining Input Information ................................................... 277 14 The Tipping Point: Risk Analysis at the Edge of Chaos. ............................ 279 The Bimodal Nature of Risk Impacts: Order vs. Disorder, Linear vs. Non-linear . 279 Complexity and Stressors: Agents of Disorder .................................. 281 A Tipping Point Warning Indicator ............................................. 284 The Tipping Point in a Quantitative Model ..................................... 286 A Tipping Point for Super Blowouts (Outliers) ................................. 288 15 Estimate Accuracy for Various Industries and Contractors ....................... 291 Accuracy References and Data for Various Industries .............................. 292 Interpretation of the Industry Data ........................................... 295 Outliers: Beyond the Pale (Beyond p90) ........................................ 301 Schedule Risk ................................................................. 306 Contractors and Contractor Data ............................................... 307 16 Communicating Risk Quantification Outcomes. ....................................... 313 Telling the Story ............................................................. 314 Tables and Figures ............................................................ 318 Dealing with Show Stoppers .................................................... 322 17 Budgeting for Risks and Account Control ........................................... 327 Risk Funds and Time Accounting ................................................ 328 Risk Funds and Time Control ................................................... 333 18 Closing the Loop . ................................................................ 337 Capturing Historical Project and Risk Information ............................. 338 Developing Risk Models and Tools .............................................. 345 Calibrating and Maintaining Risk Models and Methods ........................... 347 Improving the Project System .................................................. 349 Appendix A: The Hybrid CPM with MCS Method ........................................... 353 Base CPM with MCS Method ...................................................... 353 The Hybrid Approach ........................................................... 355 Risk Response Treatment ....................................................... 357 Tipping Point ................................................................. 358 Communicating Risk Outcomes ................................................... 359 Appendix B: Addressing Bias in Project Systems Focused on Predictability. ............ 361 Natural Cost Growth Behavior versus the Cresting Wave ......................... 362 Addressing Overestimation Bias in Historical Analysis and Modeling ............ 364 Glossary. ............................................................................ 367 List of AACE Recommended Practices (RPs) ...................................... 392 Index. ............................................................................... 393