Capital Project Risk


Mr George Sturgis

Capital project risk profiles are significantly different from risk profiles associated with ongoing operational activities. The primary driver for this difference is the unique product or service delivered by a project which makes the use of near term historical performance less reliable for assessing project risk. Capital project risk profiles require a process of determining the probability of cost and schedule overruns and assigning a percentage or a value applied as a contingency for both cost and schedule. It is a formal process that includes involvement of the project team using techniques based on Monte-Carlo principles. The risk analysis is performed on the total project cost, including all features of the project, but excluding escalation and contingency. The risk analysis is performed separately on cost and schedule then a composite cost and schedule risk is arrived at for a given probability. Common cost elements for all project activities are evaluated for cost risk and an aggregate cost risk is established. The schedule risk analysis uses similar statistical techniques and focuses not only on critical path activities but also on activities near the critical path, since they can potentially affect project schedule. The schedule logic is maintained during the risk analysis which allows cumulative effects of schedule risk for each project activity to be analyzed. Schedule and cost risk analysis are two highly-linked processes and as such overall project risk can only be portrayed by a composite risk analysis that looks at both cost and schedule risk. The scope of work for the capital project needs to be known and defined such that the schedule and the cost are based on this defined scope of work. The integrity of the base case schedule and cost estimate should be ensured through a comprehensive review. Cost and schedule risk analysis is not designed to compensate for a low quality cost estimate and/or schedule. The cost and schedule risk analysis results become part of the approved project budget for use during project execution.