Interface Consulting provides expert assistance in assessing project cost risk.
A significant challenge facing all entities that invest in or execute capital projects is what the project will cost, which clearly impacts the decision to invest in the opportunity in the first place. Every project contains an amount of uncertainty, such as equipment cost, labor cost, labor productivity, engineering quality, etc., that can affect its level of risk. Project stakeholders intuitively understand that there is a range of potential cost outcomes based on the risk profile of the project. Quantifying this range of outcomes and their probability can support the decision-making process and also determine the cost risk that the entity is assuming.
Interface Consulting’s cost risk assessment provides a risk-adjusted view of the cost for a project inclusive of various factors that might affect the outcome, including those that might be outside the project team’s control. Our expert team relies on years of experience on similar projects to provide a thorough, independent analysis of each project component. As independent consultants, we are not anchored to the development of the deterministic cost estimate; if the risk assessor is too close to the cost estimate development, he or she may rationalize control of the risk and reduce the real range of outcomes. Unrealistic optimism of the risk magnitude is a common error that stakeholders make when estimating the ultimate project cost.
Our independent experts possess deep project experience that enables them to understand the drivers for project and senior management stakeholders as well as financers and investors. Our results therefore have the credibility needed to support the findings and provide the basis for clients to take action as required.
Interface’s model uses diagnostics that, based on our experience, are root causes of project overruns. The results from Interface’s assessment illustrate not only the expected cost range of the project, but also the major risk areas as well as the steps that can be taken to mitigate those risks.
The Risk Assessment Process
Interface Consulting’s cost risk process is performed in concert with our client stakeholders. Through interviewing key personnel and reviewing project documents, we first identify important risks and opportunities. Based on these interviews, we develop an initial range of cost estimate components, which we refer to as a risk frame. We then work with the project team via an alignment workshop to reach a consensus regarding the cost risk issues. This process ensures that vital risks are fully addressed, including sensitive organizational issues, contractor performance, procurement issues, project team staffing, and workforce productivity, to name a few.
Our rigorous, four-step approach is illustrated below.
The below graphic is representative of a typical outcome from a cost risk assessment. In this example, the deterministic, or base cost, estimate is $70MM, which has a 15% probability of not being exceeded. This means there is an 85% probability that the estimate will be exceeded. In Interface Consulting’s experience of having reviewed many project estimates, it is not unusual that a detailed, deterministic cost estimate can have a low probability of being met if the estimate is not properly prepared or the contract execution is flawed.
In this example, a probabilistic risk assessment yields an expected range of P20 = $80MM and P80 = $120MM. Hence, the firm would need to fund the project at $120MM to have an 80% probability of not exceeding the estimate. In reality, many firms fund their projects at a P50 level, which in this example is $100MM. The funding level for a project is based on the organization’s risk tolerance and other project-specific issues.
Expert Analysis and Support
Each construction project is unique and faces its own set of challenges and risks. Through skillful, thorough assessment of the project’s cost risks, Interface Consulting provides clients with a realistic, quantitative view of the project risk and the range of outcomes so that an informed decision can be made.