Regardless of industry, major projects are essentially the culmination of a series of smaller projects, all of which impact one another in a variety of ways. Understanding the risks and uncertainties involved in each individual project is key to the success of the larger program. Value Management Strategies, Inc. (VMS) offers risk and management consultancy to a wide number of industries and uses @RISK to accurately identify risk factors that impact budgets, schedules and scope of projects. To gain clarity of a client’s risk and uncertainties, VMS employs a detailed “from-the-ground-up” examination to understand the chain of interconnectivity the projects have on one another and areas where potential obstacles to project and program completion may exist.
About Value Management Strategies
Value Management Strategies, Inc., based in Escondido, Ca. is a management consulting firm specializing in value analysis, value engineering and risk management for organizations in both the public and private sectors. VMS clients include state and federal government agencies, private engineering and architectural firms and local and international manufacturing firms.
Why VMS Relies on @RISK
Many of VMS’ clients are looking to deliver projects, implement processes or produce innovative products in specific verticals in a volatile and uncertain world. To successfully complete such projects, they turn to VMS to analyze the uncertainty and risk that exists in various projects and to develop risk response strategies and action plans that maximize opportunities and minimize threats. In this capacity, the VMS’ utilization of Monte Carlo simulation through @RISK helps to support the decision-making process, as well as offer a more granular understanding of the nature of uncertainties being characterized. Clarity of the likelihood and exposures of risks can help to minimize delays and maximize efficient deployment of capital resources.
Identifying Critical Uncertainties
When constructing a risk model for a client, VMS utilizes @RISK to simulate two key types of uncertainties to better understand the nature of the system:
Cost estimating—This is a statistical analysis of historical data, trend analysis and distribution formulation to forecast projects, products or process costs. The inputs into this component are unit prices and quantities for specified units. The outputs are costs or schedule estimates with baseline uncertainty. Creating cost estimation includes the following steps:
- Estimate projects from a range bound perspective
- Acknowledge uncertainty in components of cost
- Utilize ranges founded in historic data
- Observe recent bid data
- Adjust bid data for project relevance
- Make the data “fit” the project
- Adjust bid data to account for market-based factors
- Run Monte Carlo simulation
- Establish ranges for costs
- Develop confidence intervals
Event risk—Identifying event risk involves the assessment, elicitation and compiling of various types of events in terms of both their probabilities and anticipated impacts in terms of cost, time, and performance. The risk events are classified as either threats or opportunities depending on how they may positively or negatively impact the project, process, or product. Creating event risk includes the following steps:
- Identify uncertainties
- Identify opportunities
- Identify threats
- Establish probable frequency of occurrence
- Establish range of potential impact
- Establish distributions
- Identify dependencies and correlations between risk events
- Run Monte Carlo simulation
Once cost estimating and event risk baselines have been established, the next step involves combining the two to create a risk profile to see how numerous variations of the two factors will impact one another. Using @RISK, VMS can produce an enhanced risk assessment that illustrates the total risk profile for the project, product, or process under observation. Clients can see where cost overruns may be most likely, where delays of material deliveries may exist, what factors may impact pricing, etc.
“We have found that @RISK can be used to analyze multiple smaller projects comprising a mega project — enabling us to translate that data into managing risk across a large program. The modelling techniques being applied included an integrated cost and schedule risk model that takes into consideration the deployment of resources over time,” said Gregory Brink, Director, Risk Management and Economics at VMS. “Being able to understand where potential disruptions and various risk events may influence a program helps to make better decisions in being able to effectively manage and deliver large projects and programs with less uncertainty.”
Director of Risk Management and Economics, VMS
Useful Aspects of @RISK
In creating risk analysis reports for clients, VMS found a number of specific @RISK features helpful in quickly and accurately offering clients easily-understood data:
- Output graphs—VMS uses the graphs to indicate distributions for total projected costs and durations, anticipated completion dates, allocation of resources over time, as well as indicating the areas of greatest variability and influence on projects, processes, or product costs and schedule estimates.
- Model construction/quick simulation tool bars—With useful and intuitive tool bars, VMS is able to derive results easily. Also, the menus simplify navigation through model construction elements.
Benefits of @RISK
Presenting the following insights into risk has clear and impactful benefits when VMS consults clients on large, costly projects:
- Reduced margin of error between realized costs and engineering estimates
- Increased certainty in project, program, product, and process costs
- Early identification of material price volatility/logistical risks
- Proactive updates easily relayed to management
- Risks moved into an actively managed state
- Better control of scope, schedule, and budget throughout project/program development and delivery
“The key benefits to using the software are being able to genuinely ask the question, ‘What if?’ and synthesizing those complex uncertainties into a comprehensive determination of what would ensue,” said Brink. “The information is contained in a comprehensive understanding of risk, that enables better decision making and ultimately, more successful projects, process implementations and product developments for the optimal value.” With @RISK’s ability to forecast potential disruptions to completion and cost, VMS can confidently offer clients a roadmap to more effectively manage projects, processes, and deliver profitable programs. “The application itself is very intuitive. The use of @RISK enables the understanding of uncertainties involved in the statistical estimates being used,” said Brink. “Overall, I would sum up @RISK as a robust means to analyze risk and make confident decisions in the face of uncertainty.”