Hamilton Risk+Value Consultants, LLC

Risk Analysis Summary

The data inputs/outputs for the Baseline 95% Cost Estimate, the 95% Submittal Risk Analysis and the Post-Bid Risk Model are shown in Table 1 below.

The Skew of 0.3 on the 95% Submittal Risk Analysis shows that the risk team felt that costs could grow, whereas the Post-Bid Risk Model with a Skew of 0.1 reflects a probability distribution which is nearly symmetrical around the vertical axis. The Kurtosis of the 95% Design Risk Analysis is 2.8 vs -0.3 for the Post-Bid Risk Model. This reflects the sharper, more pointed vertical distribution of the 95% Submittal Risk Analysis.

Constructability/Risk teams are not always informed of the bid results, but the findings of this example yield key lessons learned for future risk studies, and include the following.

  • Design firms often adjust the project plans and specifications following risk studies and prior to bidding, to reduce risk to the contractor by risk-sharing, spec clarifications, adjustments to insurance requirements, offering unit price (force account work) for unknowns such as dewatering or hazardous materials and price escalation clauses for volatile materials, i.e. copper, fuel, etc.
  • Risk teams often focus on a single point estimate or “mean” of each cost line item rather than accurately projecting the P10 and P90 range of each line item. Think extremes.
  • In a competitive market, contractors can be quite adept at dealing with risk items and often times are more creative in these endeavors than expected by the risk team.
  • Bid prices do not reflect actual finished project costs which need to include future change orders, etc. Therefore some cost creep is bound to occur as the project progresses through completion. This cost growth can easily be 5 – 10% of the original bid amount. If this assumption is valid, the risk team on this water plant project may be fairly close in predicting the final project cost. The low bid of $21.9M could grow to the risk team’s projection of $23.8M if substantial complications occur. Therefore, the risk projections by the team should not be compared to the “low bid”, but rather the final cost of the project. The risk team may be accurate in their projection of the “finished” project cost.
  • Risk teams should assume that some risks will be mitigated either by the design team or the contractor in the field. However, risks pertaining to unknown conditions could have substantial impact upon project costs and schedule durations in the form of change orders and claims. For example slight differences in soil stiffness in trench excavating can greatly impact contractor productivity, with a very fine line between “rippable with a D-8 dozer” and “excavatable” with a CAT 345 excavator.
  • Risk teams should be cautioned not to focus on a single risk element and allow it to overshadow their perspective and ratings of other line items in the WBS. Give the contractor credit for having the ability to solve some risks without cost to the owner.
  • Inform the owner and design team of all relevant risks identified by the risk team; this keeps them informed and allows the designers to consider the impacts of the risks and possible mitigation measures to incorporate into the project documents.
  • In this case, the risk team may have been slightly biased, resulting in a risk distribution which is overly conservative. The final project cost at completion will be the true accuracy test for the risk team.

Contact Information
Hamilton Risk+Value Consultants, LLC
558 SW 333rd Court
Federal Way, WA 98023
Phone: 253-229-7703
Email:        dave@hamiltonrisk-value.com
Website:   www.hamiltonrisk-value.com