Service Focus Areas
Cost Estimate Validation Process (CEVP®)
The CEVP process was developed by John Reilly, working with the Washington State Department of Transportation (WSDOT) initially in 2002, with improvements to the process through 2013. It is registered to WSDOT to recognize their role in its development and implementation.
Recognizing Risk and Uncertainty
A key concept is that any value in the future is not a single number but a range – which can be dependent on many factors and variables.
The intent of the CEVP process is to determine an accurate estimate range for both cost and schedule – key risks must be identified, characterized and measured. Formerly, cost estimates accounted for risk based on the estimator’s experience and best judgment, without necessarily identifying and quantifying such risks—project uncertainties and risks were included in a general “contingency” that was applied to account for such uncertainties.
In CEVP, estimates are comprised of two components: the base cost component and the risk component. Base cost is defined as the planned cost of the project if everything materializes as planned and assumed—the base cost does not include contingency but does include the normal variability of prices, quantities and like units. Once the base cost is established, a list of risks is created and characterized, including both opportunities and threats, and listed in a Risk Register. This risk assessment replaces general and vaguely defined contingency with explicitly defined risk events and include the probability of occurrence plus impact on project cost and/or schedule for each event. The risk component is usually developed in a CEVP Cost Risk Workshop.
The process includes:
- Evaluating the quality and completeness of the projected cost and schedule of the project, including identification and characterization of potential risk and uncertainty.
- Defining, using rational, established risk and probability processes, the range of potential costs and schedules for each project based on the best available information.
- Developing and documenting a series of recommendations to be considered and, if valid, implemented on a project-by-project or program basis that will enhance the credibility of the cost estimate and schedule.
- Defining and characterizing risks in order to develop and implement risk management, risk response and risk mitigation plans for the project(s).
Estimating project costs and schedules and the likely range of possible outcomes is an important and crucial task for owners and project managers. See references at the end of this section.
CEVP has been recognized by the US Federal Highway Administration. It has been used in many US states and cities and for several international projects.
Definitions: Base Cost, Base Schedule and Risk
Base Cost represents the cost that can reasonably be expected if the project materializes as planned. Base cost typically has relatively small uncertainty or variance. Base cost is initially estimated by the Project Team, reviewed and validated by a “Cost Lead” before the workshop, then that validation is confirmed in the workshop by the CEVP Team with the Subject Matter Experts.
Base Schedule represents the schedule that can reasonably be expected if the project materializes as planned. Base schedule typically has relatively small uncertainty or variance. Base schedule is initially estimated by the Project Team and reviewed and validated by the Schedule Lead before the workshop, then that validation is confirmed in the workshop by the CEVP Team with the Subject Matter Experts.
Risk is the combination of the probability of an uncertain event and its consequences. A positive consequence presents an opportunity; a negative consequence poses a threat or impact to project objectives.
When characterized, risk describes potential exposure to the consequences of uncertainty. In a project context, it is the probability of an event that, should it occur, will have an impact upon project objectives. It includes the possibility of loss or gain, or variation from desired or planned outcomes, as a consequence of uncertainty associated with following a particular course of action. Risk thus has two elements—the likelihood or probability of the event happening and the consequences or impacts if it does.
RESULTS, MANAGEMENT OF COMPLEX PROJECTS TO BUDGET
CEVP with Value Engineering and critical scope evaluation can optimize projects and also evaluate changes that are necessary to deliver the project within authorized budgets. The following example is from the Seattle Alaskan Way tunnel, where this process was used to define the specific project that could be delivered within the authorized budget – with a 60% probability of delivery at or below $1.96 billion. The tunnel could have been delivered at this probable number, but because of the occurrence of a very low probability / high impact event (which had been included in the risk register) the project went over budget.
Range of probable cost – 60% chance of achieving budget of $1.956 Billion.
For a detailed description of how the Washington State Department of Transportation (WSDOT) developed CEVP to review and validate cost estimates for large, complex infrastructure projects as well as to address risk and opportunity, please download John’s paper using the following link:
RIAAT – RISK ANALYSIS AND MANAGEMENT TOOL
RIAAT is an advanced cost and risk management software program that allows owners, contractors and designers to efficiently manage projects during their complete life cycle. RIAAT combines structured (hierarchical) cost and schedule input, cutting edge simulation and modeling capabilities, a clear project structure and ease of use. Following is a summary of the key elements of RIAAT. For more specific details, please refer to the RIAAT section of the RiskConsult website at http://riaat.riskcon.at. RIAAT Integrated Cost and Schedule Model
The following figure shows the process for setting up the integrated cost and schedule model. In the first step, Base Cost is estimated and validated, subjected to uncertainties, and integrated into the Work Breakdown Structure (WBS). Subsequently, identified risks and a markup for unknowns with cost and time impacts are assessed and integrated into the WBS and the construction schedule.
- Base cost estimate is reviewed, associated with uncertainties and integrated into the WBS.
- Risks are assessed (cost and time impact) and integrated into the WBS.
- Risks are assigned to tasks in the project’s schedule. Subsequently, completion date, critical paths and delays from risks are simulated.
- Cost impact from time delay is calculated with time-related cost and integrated into the WBS.
- Project Cost, including uncertainty, is available on all WBS levels and for all cost components.
The program is fully integrated with cost, schedule and risk. Because of the probabilistic risk process, multiple critical paths can result, including a determination of who owns, or contributes to that critical path. Therefore the tool can be useful in project management and forensic analysis for claims and disputes.
An example of a critical path schedule with risk contributions to the critical paths owners is shown following.
REFERENCES REGARDING RISK, CEVP AND RIAAT
AACE International 2003, “AACE International Recommended Practice No. 17R.97”
AACE International 2003, “Cost Estimate Classification System,” http://www.aacei.org/technical/rps/18r-97.pdf
Bier, V. M. 1997, “An Overview of Probabilistic Risk Analysis for Complex Engineered Systems,” in “Fundamentals of Risk Analysis and Risk Management,” Vlasta Molak, Lewis Publishers, chapter I.5.
Da Costa Lewis, N. 2004, “Operational Risk with Excel and VBA: Applied Statistical Methods for Risk Management,” John Wiley and Sons
Grayson, J., Nickerson, J. & Moonin, E. 2015, “Partnering through Risk Management: Lake Mead Intake No. 3. Risk Management Approach,” RETC June
IEC/ISO 31010: 2009
Moergeli, A., Sander, P., Reilly, J.J., 2015, “Risk-Based, Probabilistic Cost Estimating Methods,” Paper and Presentation, WTC 2015, Dubrovnik
PMI 2004, “Project Management Body of Knowledge,” Project Management Institute, Pennsylvania
Reason, J. 1990, “Human Error,” Cambridge University Press
Reason, J. 1997, “Managing the Risks of Organizational Accidents,” Ashgate publications
Reilly, J.J 2004, w. McBride, M., Sangrey, D., MacDonald, D. & Brown, J. “The development OF CEVP® – WSDOT’s Cost-Risk Estimating Process,” Proceedings, Boston Society of Civil Engineers
Reilly, J.J 2010, “Cost and Schedule Control,” in “Megaprojects: Challenges and Recommended Practices” ACEC
Reilly, J.J, 2013, Author of the Foreword, co-author of the Chapters on Risk and Cost + Schedule management in “Managing Gigaprojects,” ASCE press, Ed Galloway, Nielsen and Dignum
Reilly, J.J., Sander, P., Moergeli, A. 2015, “Construction – Risk Based Cost Estimating,” Paper and Presentation, RETC 2015, New Orleans
RIAAT 2014, http://riaat.riskcon.at/
Sander, P., Spiegl, M. & Schneider, E. 2009, “Probability and Risk Managment,” Tunnels & Tunnelling International
Sander, P. 2012, “Probabilistische Risiko-Analyse für Bauprojekte,” Innsbruck University Press, Innsbruck, ISBN: 978-3-902811-75-2
Sander, P. 2014, “Continuous Cost and Risk Management for Major Projects in the Infrastructure Sector,” Brenner Congress
Sander, P., Moergeli, A., Reilly, J. 2015, “Quantitative Risk Analysis – Fallacy of the Single Number,” Paper and Presentation, WTC 2015, Dubrovnik
Talib, N.N. 2007, “The Black Swan: The Impact of the Highly Improbable,” Random House
Vose, D. 2008, “Risk Analysis – A Quantitative Guide,” John Wiley and Sons
WSDOT 2015, “Cost Estimating Manual for WSDOT Projects,” Guideline Document
WSDOT 2014, “Project Risk Management Guide”