Probabilistic Risk Management in Design and Construction Projects (Best Practice)

RT-280 Topic Summary
RT 280

Overview

This material is a summary and examination of a CII research team’s findings resulting from a survey of 104 contractor and owner organizations worldwide. The topic provides an overview of when, why, and how probabilistic approaches are used, and documents the kinds of successes organizations were achieving through probabilistic risk management. In addition, the research team examines the benefits as well as barriers of implementing probabilistic controls at three levels of risk analysis: identification, deterministic, and probabilistic.

The team’s initial survey results indicated that 90 percent of organizations implementing probabilistic approaches to project risk management achieve a return on investment (ROI) of at least 1:10, while a third of the respondents noted ROIs exceeding 1:100. 

To identify the process, benefits, and implications of probabilistic analysis of cost and schedule risks in the design and construction of capital projects, the research team employed both quantitative and qualitative methods for data collection and analysis.

The research pool included Owners and Contractors and varied among markets include horizontal, vertical, and process types of projects. 

Additional findings allowed the team to holistically catergorize "risk triggers" into four groups: Project Cost, Delivery Method, Novelty, and Project Location(s).

Key Findings and Implementation Tools

1 : Level of Risk Management

There are 3 processes that organizations can use to implement more advanced project risk management approaches, including probabilistic analysis. This process comprises three levels, each of which offers clear benefits: risk identification, deterministic analysis, and probabilistic analysis.
Reference: (RS280-1)

2 : Not All Projects Merit the Use of Probabilistic Approaches

Probabilistic methods manage project risk and uncertainty in cost, scope, and schedule by taking into account known and unknown events or conditions that cannot be adequately identified or defined, either independently or comprehensively.

The team deterimined 4 project attributes or “triggers” that would lend itself to a probabilistic approach to risk management:

  • Project Cost: projects tended to utilize level 3 approach when costs exceeded $10-15M
  • Delivery Method: projects that fell outside a companies “typical” delivery method
  • Novelty: New project, new technology, or a new market
  • Location: Considerations of geographical landscape, governmental regulations, and government instability
Reference: (RS280-1)

3 : Significant Benefit When Using Probabilistic Approach

Over 70% of all respondants noted “Significant” or greater impact across six measureable benefits. (RS280-1, p. 22)
Reference: (RS280-1)

4 : Probabilistic Risk Management Benefits the Whole Project Team and the Project Life Cycle

“Organizations and project teams benefit from the implementation of probabilistic approaches at all phases in a project’s life cycle, starting at the beginning of the front end planning (FEP) phase and continuing through detailed design, construction, and operations. Both owners and contractors indicated that the use of probabilistic simulation outputs 1) helps them decide which projects to pursue, 2) strengthens their ability to establish contingency levels and realistic schedule durations, and 3) improves their skills at identifying and prioritizing risks.” (RS280-1, p.30)
 
Reference: (RS280-1)

5 : Implementation Tool #1

IR280-2, Applying Probable Risk Management to Design and Construction Projects

A comprehensive guide to probabilistic risk analysis, first to help organizations determine whether the probabilistic approach is appropriate for their projects, and, if appropriate, to help them implement it. The guide takes the user through the typical steps of adopting probabilistic risk analysis, from identifying risks to interpreting a probability distribution. The guide also provides an overview of the interactive risk register tool, also developed by the research team.

IR280-2 Risk Register Tool (Excel Spreadsheet)  

Helps project personnel create project risk registers and selecting the appropriate risk management level.
Reference: (IR280-2)

6 : Implementation Tool #2

IR280-3, “What’s the Risk” Quick reference guide  

A two-sided, laminated reference sheet explaining the appropriate uses and interpretations of three levels of project risk analysis. Includes descriptive samples of probabilistic risk analysis outputs, e.g., heat maps and tornado charts.
 
Reference: (IR280-3)

Key Performance Indicators

Improved cost, Reduced/improved risk

Research Publications

Applying Probabilistic Risk Management in Design and Construction Projects, Version 1.2 - IR280-2

Publication Date: 03/2013 Type: Implementation Resource Pages: 37 Status: Tool

Probabilistic Risk Management in Design and Construction Projects, Version 1.1 - RS280-1

Publication Date: 10/2012 Type: Research Summary Pages: 33 Status: Supporting Product

What’s the Risk? - IR280-3

Publication Date: 06/2012 Type: Implementation Resource Pages: 2 Status: Tool

Applying Probabilistic Risk Management in Design and Construction Projects - RR280-11

Publication Date: Type: Research Report Pages: Status:


Supporting Resources

Presentations (CII Annual Conference & Workshops)

Plenary Session - Applying Probabilistic Risk Management in Design and Construction

Publication Date: 06/2012 Presenter: Number of Slides: 12 Event Code: AC12

Implementation Session - Applying Probabilistic Risk Management in Design and Construction

Publication Date: 06/2012 Presenter: Number of Slides: 43 Event Code: AC12

Session - Applying Probabilistic Risk Management in Design and Construction Projects

Publication Date: Presenter: Number of Slides: 62 Event Code: PIW413


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