Project Cost Risk Analysis Using Crystal Ball-1
- Topics:
- Modeling,
- Project Management
- Tags:
- Crystal Ball,
- Security,
- Risk Analysis,
- Risk,
- Overruns,
- Management,
- Future Estimate,
- Estimate,
- Data Collection,
- Strategy
- Source:
- Crystal Ball
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Overview: The typical project often overruns its cost estimate. Overruns are common on government and commercial projects, even when changes in the design are taken into account. One reason this happens is because cost estimating traditionally fails to take into account the risk that the work will actually cost more (or less) than provided by even the most competent estimate. Future estimates are not facts but statements of probability about how things will turn out. Because estimates are probabilistic assessments, costs may actually be higher or lower than estimated even by seasoned professional estimators. The reasons are often causes that are outside the control of the project manager, but may also be endemic to the estimating process, the project strategy or the corporate culture within the project contractor. A cost risk estimating method is available that provides more accurate estimates of total project cost. The method is based on Monte Carlo simulation. It helps gain better information than traditional methods because it recognizes that project costs are uncertain. Traditional cost estimating methods that rely on summing up project elements’ cost estimates will not result in even the most likely total project cost. Traditional methods cannot answer the important questions of: (1) how likely are we to overrun? (2) What is our exposure? and (3) Where is the risk in the project? A Monte Carlo simulation can provide answers to these questions. Data collection is crucial to a powerful risk analysis. Data must be collected on low, most likely and high possible costs and on correlation between elements. Crystal Ball provides the computing power for the Monte Carlo simulations. The purpose of a cost risk analysis is to assist the project manager by indicating the magnitude of the problem and where risk management efforts should be focused. This paper has indicated how this is accomplished using a simplified construction cost case study.
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Format: HTML | Date: Jan 2003 | Pages: 1
