:AACE CERTIFICATION 2009-2010:

Week#11 – Andy’s Blog

Reading on recent four papers/articles of AACE on General Principles and Risk Estimating Methods download from the Web Site introduce me in different terminology and approached on risk analysis methods compared with the Humphreys book which is currently used for my research on the risk assessment. I thinks it’s good to obtain deep understanding of the articles that could implement on the current practice of risk analysis and to compare whether any relationship between two different term and approach of risk analysis between Humphreys and the articles in manner to fulfill my research on the risk assessment.

The four articles are actually Recommended Practice (RP) of AACE international to provide guidelines for contingency estimating that they would recommend be considered for use where applicable. The articles are titled :

1. Contingency Estimating – General Principles
2. Risk Analysis and Contingency Determination using Range Estimating
3. Risk Analysis and Contingency Determination using Expected Value
4. Risk Analysis and Contingency Determination using Parametric Estimating

As it may quite wide range topic for this week blog, while I just limit and summary the topic on general principles of contingency estimating in this week blog report then the rest overview will be written and overview next week.

General Principles of Contingency Estimating

Any methodology developed for quantifying risk impact should address general principles :

• Meet clients objective, expectations and requirement, considering constraints in terms of time, resources availability, quantification methods validation and client’s level of risk tolerance should be gauged such the budget or schedule represent the most likely result, or a more conservative or aggressive outcome.
• Effective decision or risk management process , the risk management process must be identified that the estimating practices are supporting and make sure their outcomes facilitate the process, e.g. TCM frame work is being a generic model for such a process.
• Fit for use, In addition to considering the general requirements of the client and the process, any other contextual that may affect the estimating risk and how they are managed are required to considered such : Portfolio, project type, risk type, project phase, base estimate or schedule methodologies, skills and knowledge of the team participants.
• Identifying risk drivers, this process needs to consider both inherent estimate uncertainty and risk events including both project specific and external risks that may impact the project.
• Link risk drivers and outputs whether it’s link potential impact with cost and schedule
• Avoid iatrogenic (self-inflicted) risks, the number of risks should be screened in manner that only risks have potential critical level in regard of it’s probability and severity. The risk impact estimated should be developed by expert judgment to ensure the risk impact is not underestimated or over estimated.
• Employs empiricism, as a general practice is as on taking experience from the past and applying it to the present and future e.g. regression, benchmarking, or validating analysis results against historical data.
• Employs experience/competency , no estimating will provide reliable estimates without the input of a experiences and competent estimator (a risk analyst).
• Provide probabilistic estimating results help to ensure that the client understands the potential consequences of their decision and in a way the support effective decision making and risk management.

There are some classes methodology of risk analysis, as summarize below, i.e. :

Expert Judgment , means that the judgment must have a strong basis in experience and competency in risk management and analysis. This method is highly subject to imposing iatrogenic risk when the judgment is inconsistent or biased which can be minimized by obtaining the consensus of multiple experts or experience team.

Predetermined Guideline (with varying degrees of judgment and empiricism used), This method is simple, understandable and consistent and as such, it is easy to get management buy –in and often used by inexperienced people. The methods for use on all estimates of a certain type to complex tables or scoring mechanisms that employ elements of parametric modeling. A disadvantage is that it can not effectively address risks that are unique to a specific project or risk that are common but may have inordinate impacts on a given project.

Simulation Analysis, This method combines expert judgment with an analytical model that is used in a simulation routine to provide probabilistic output that is facilitates the analyst’s and teams experience and input, which is particularly well suited for project specific risk. A disadvantage is the method’s complexity which requires expertise in application, the outcomes are not highly consistent dependent on the analyst and team input, and more challenging to apply effectively for systematic risks. The simulation analysis most common methods in use are Range estimating and Expected Value ; both of which use Monte Carlo or similar simulation routine and also Parametric Modeling

Hybrid methods that combine several or all of the above classes. .

Here is table summary of relationship between the general principles and the classes of risk methods

# posted by Andy @ 12/19/2009 04:22:00 PM