Cost Risk Assessment (CRA)

Cost Risk Assessment(CRA)

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Presenter Profile – Scott Berg Earned Value Senior Consultant Has worked on numerous programs of diverse size,

complexity and nature as: Risk analyst Cost analyst Scheduler

Has performed over 200 Cost Risk Assessments on both proposals and on-going projects

Has consulted as an EV SME Holds BA and MS in Economics from the University of Utah. Taught in-house Earned Value courses at L3-CS-West from

2011-14. [email protected]

mailto:[email protected]

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Project Management Service Provider

Nationwide capability (Operating in over 17 states)

Over 50 clients, mostly Fortune 100/500

Headquarters in Hopkinton, MA

Satellite offices Huntsville, AL Dallas, TX San Diego, CA

Focus Industries Aerospace & Defense Development Engineering High Tech/Healthcare/IT Complex Development Projects in any industry

Fully insured, most employees have US Government security clearances

COMPANY OVERVIEW

Nationwide Team of ExpertsCost Effective Solutions

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Project Planning & Scheduling Program Planning Program Control System Build & Run Proposal Planning & Scheduling Startup, Replans and Surge Planning PP&C Standard & Custom Training

Earned Value Management System (EVMS) System Compliance Efficient EVMS Business Processes EVMS Training & Surveillance

Project Management Management System Implementation Project Execution Management Visibility for Executive Steering Team Training

COMPANY OFFERINGS

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Cost Risk AssessmentQuantifying risk and uncertainty is a cost estimating best practice Uncertainty: the indefiniteness about the outcome of a

situation Point estimate: The expectation of “the team” Risk: The chance of loss

Uncertainty

Opportunity(Lower cost)

Risk(Higher cost)

Poin

t Es

timat

e

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Cost Risk Assessment

What risks could impact the outcome of the project?o Technical risks -- how might technical risks impact project

performance?o Cost risks -- what are the sources and magnitudes of cost

variances? o Schedule risks -- is time really money and what cost

impacts are likely due to schedule variances? Are there unexpected technical gains that can be

realized? What can the program team do to improve schedule

performance? Are there ways to more efficiently accomplish the

project requirements?

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Cost Risk Assessment

Cost Risk Assessment must have a basis in fact or it’s merely another opinion that can be easily dismissed Using valid “Sim-to” historic performance is the best way to

estimate risk potential More historic observations makes for better estimation

o Similar activityo Similar deliverableo Same organization

Generic risk multipliers can be used if valid performance history is not available

Monte Carlo simulation provides the quantificationthat validates the CRA results

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Knowing the Project

A project is: A temporary endeavor with a limited duration A unique planned set of specifically defined interrelated

tasks Effort designed to accomplish well defined objectives Planned with specific scope and timing Complete when all the defined objectives are complete

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Knowing the Project

What are the unique conditions of each activity? Required Resources

o Laboro Materialo Subcontracts

When the activity happens in the project

KickoffDesign

ProcureBuild

TestShip

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Measuring Project RiskImportant to know What is being done Where it’s being done When in the program (Early, Late, Last) is it being done

o Finishing is usually harder than starting What resources are being used

o Different resources have different risk o Hardware builds include labor and materialso Sometimes Project Management (PMO) resources can be

consolidated

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Measuring Project Risk

Account for correlation between activitiesCorrelation: A mutual relationship or connection between two or more things What tasks should be correlated?

o Build Labor and Ops Management?o NRE and System Engineering?

What is the basis of fact for determining correlation? Can tasks have negative correlations?

o Discrete tasks and Level of Effort?

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Estimating Project RiskWhat is being done by whom and where impacts the risk profile of the task

Typical Risk LevelTask Technical Cost Schedule

Clean Sheet Engineering

“Sim-to” Engineering

SW/HW Integration

New Build

LRIP

Full Rate Production

Clean Sheet Engineering SEVERE SEVERE SEVERE

HIGHSEVERE

SEVERE

SEVEREHIGH

HIGH

HIGH

HIGH

HIGH

MEDIUM

MEDIUM

MEDIUM

LOW

LOW LOW

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Earned Value and CRA

Earned Value Management (EVM) is a project management process or technique that integrates technical, schedule and cost aspects of a project to measure performance An integrated management system and its related sub-

systems which allow for:• Organization of all work scope• Assignment of authority and responsibility• Objective measurement of progress (earned value)• Accumulation and assignment of Actual Costs• Analysis of Significant Variances from plans• Summarization and Drill-Down of performance data throughout • Forecast completion of milestones and contract events• Estimate of final contract costs• Authorization of all project activities

Presenter

Presentation Notes

So let us talk about the EVM system, and what we mean by an integrated management system. First and foremost, an EVM system is an integrated management system. These are the characteristics of what the system provides: it provides processes to plan all work to go for the entire program, and assigns authority and responsibility at the level where work is performed. It integrates cost, schedule, and technical aspects of a project into a detailed baseline plan, and it provides an objective way for us to measure progress at the work performance level. The EVM system allows us to accumulate and assign actual costs and compare them at the lowest level. One of the outputs of the EVM system allows us to analyze variances for these plans, and summarize this data to higher and higher levels of management, allowing managers to take action. It allows us to forecast the achievement of schedule milestones and when we will be finished with the contract. It also allows us to forecast what we think the final costs will be. And finally, the EVM system provides for maintenance of the baseline and incorporation of revisions to the baseline in a timely manner.

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Why EV is important to CRAAll project activities are defined and assigned Product identification defined (WBS) Responsible party assigned (OBS)

Eng.

Mfg

Owner

SW

HW

Build

Install

1.0

1.21.1

1.1.1 1.1.2 1.2.1 1.2.2

1.1.1.A

1.1.2.B

1.1.2.A

1.1.1.B

1.2.1.A

1.2.2.A

1.2.2.B

1.2.1.B

1.2.1.C

Control Accounts

OBS

WBS

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EV Metrics

All project scope has basic metrics Scheduled to date BCWS Accomplished to date BCWP Actual cost to date ACWP Budget at Complete BAC Estimate at Complete EAC

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EV MetricsAll project scope has Performance metrics Schedule metrics

o Schedule variance (SV)o Schedule performance index (SPI)

Cost Metricso Cost Variance (CV)o Cost performance index (CPI)

What the metrics mean The variances:

o Positive: Good Under budget, ahead of scheduleo Negative: Bad Over budget, behind schedule

The performance indices:o Greater than 1: Good Under budget, ahead of scheduleo Less than 1: Bad Over budget, behind schedule

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Earned Value’s importance to CRA

Characteristics of EV that are important to CRA All scope is planned All completed work is measured Actual costs correspond to earned value

Work remaining (BCWR) is clearly defined “What” is left to do “Who” is responsible for doing it

Clear relationship between BCWR and ETC The estimate to complete (ETC) corresponds to the

Budgeted work to complete (BCWR)

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Monte Carlo Analysis

Monte Carlo simulation: Furnishes the decision-maker with a range of possible

outcomes and the probabilities they will occur for any choice of action

Extreme possibilities—the outcomes of going for broke andfor the most conservative decision

Possible consequencesfor decisions

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Common Probability Distributions (Curves)Normal Symmetric “Bell curve” Two points: Mean and Standard Deviation Values in the middle near the mean are most likely to occur

PERT/Beta Three points for Best Case, Medium Case, Worst Case Appropriate for activities that about which much is known, often

outperform expectation, but can overrun by a considerable amount.

Triangular Three points for Best Case, Medium Case, Worst Case Compared to the PERT, the extremes are more emphasized. Triangular is most often used for activities about which there is

less knowledge about the outcome.

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During a Monte Carlo simulation Values are sampled at random from the input probability

distributions. Each set of samples is called an iteration, and the

resulting outcome from that sample is recorded. Monte Carlo simulation does hundreds or thousands of

iterations. The result is a probability distribution of observed outcomes.

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Monte Carlo simulation provides a much more comprehensive view of what may happen. It tells you:

o What could happeno How likely an event or outcome might beo What the consequences could be

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Monte Carlo AnalysisMonte Carlo simulation provides a number of advantages over deterministic, or “single-point estimate” analysis: Probabilistic Results. Results show not only what could

happen, but how likely each outcome is. Graphical Results. Easy to create graphs of different

outcomes and their chances of occurrence. Correlation of Inputs: Possible to model interdependent

relationships between input variables. Scenario Analysis: Analysts can see exactly which inputs

had which values together when certain outcomes occurred. This is invaluable for pursuing further analysis.

Sensitivity Analysis. Easy to see which inputs had the biggest effect on bottom-line results.

Quadcopter Cost Risk Assessment

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QuadcopterDevelopment of a new piece of hardware $600 million Contract Value

o Non Recurring Engineering• Hardware Design• Navigation system• Software Development

Hardware Quantities:o Prototype: 1 unito Test Build: 2 unitso LRIP: 20 unitso Full Rate Production: 1000 units

Budgets:o Current effort detail plannedo Future work in planning packageso 10 percent of cost budget in Management Reserve

Performance to date:o Slightly behind schedule and over budget

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QuadCopter Scope Overview

All Dollars (000)

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QuadCopter Earned Value Results

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QuadCopter Earned Value Results

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QuadCopter CRA Results

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$674.2M

$610.6M

Program EAC $532.4M

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Full Rate Production Removed

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$83.5M

$81.6.5M

Program EAC$73.5M

Cost Risk Assessment (CRA)

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