Risk and Uncertainty in the Cost Contingency of Transport Projects: Accommodating Bias or Heuristics, or Both?

Transport projects are regularly subjected to cost misperformance. The contingency set aside to cover any increases in cost due to risk and uncertainty issues is often insufficient. We review approaches that have been used to estimate a cost contingency. We show that some approaches such as reference class forecasting, which underpins the planning fallacy theory, take a biased view to formulate a contingency. Indeed, there is a perception that the risks and uncertainties that form the parts of a cost contingency cannot be accurately assessed using heuristics. The absence of an overarching theory to support the use of heuristics has resulted in them often being downplayed in a project's investment decision-making process. This article fills this void and provides the theoretical backdrop to support the use of heuristics to formulate a cost contingency. We make a clarion call to reconcile the duality of the bias and heuristic approaches, propose a balanced framework for developing a cost contingency, and suggest the use of uplifts to derisk cost estimates is redundant. We hope our advocacy for a balanced approach will stimulate debate and question the legitimacy of uplifts to solely debias cost estimates

Assessing the Maturity and Accuracy of Front End Engineering Design (FEED) for Large, Complex Industrial Projects

abstract: Planning efforts conducted during the early stages of a construction project, known as front end planning (FEP), have a large impact on project success and significant influence on the configuration of the final project. As a key component of FEP, front end engineering design (FEED) plays an essential role in the overall success of large industrial projects. The primary objective of this dissertation focuses on FEED maturity and accuracy and its impact on project performance. The author was a member of the Construction Industry Institute (CII) Research Team (RT) 331, which was tasked to develop the FEED Maturity and Accuracy Total Rating System (FEED MATRS), pronounced “feed matters.” This dissertation provides the motivation, methodology, data analysis, research findings (which include significant correlations between the maturity and accuracy of FEED and project performance), applicability and contributions to academia and industry. A scientific research methodology was employed in this dissertation that included a literature review, focus groups, an industry survey, data collection workshops, in-progress projects testing, and statistical analysis of project performance. The results presented in this dissertation are based on input from 128 experts in 57 organizations and a data sample of 33 completed and 11 on-going large industrial projects representing over $13.9 billion of total installed cost. The contributions of this work include: (1) developing a tested FEED definition for the large industrial projects sector, (2) determining the industry’s state of practice for measuring FEED deliverables, (3) developing an objective and scalable two-dimensional method to measure FEED maturity and accuracy, and (4) quantifying that projects with high FEED maturity and accuracy outperformed projects with low FEED maturity and accuracy by 24 percent in terms of cost growth, in relation to the approved budget.Dissertation/ThesisDoctoral Dissertation Construction Management 201

Owner time and cost contingency estimation for building construction projects in Egypt

Time and cost overruns are an integral part of the construction projects. Both have several associated negative consequences to the project owners. Setting the right time and cost contingency is a major contributing factor to the success of the project as it should minimize/prevent budget and time overruns. Project managers usually tend to allocate project time and cost contingency subjectively based on their previous experience and may not capture all projects specific factors that impact the contingency estimation. The competency of the project manager plays an important role in this case in determining the contingency percentage. The contingency estimation for a given project can hugely vary from one project manager to another. This research presents a fuzzy logic-based model that allows owners predict the project time and cost contingency reliably and accurately in Egypt. The most important factors affecting time and cost contingency have been identified and are defined as input variables for the model. The effect of these factors on the time and cost contingency, the output variables, have been determined and incorporated into the model via fuzzy rules. On the basis of the known effects of these factors, a fuzzy logic model is developed to automate the prediction process using MS Excel software. Several scenarios of the model are developed and subjected to initial testing using 10 actual projects data. Based on the initial testing, the best model was subjected to tuning in order to achieve the optimum model results in terms of accuracy and validity. Finally, the model is tested by applying it on new five actual construction projects which were not used in the initial testing nor tuning. The model results were found to be acceptable having an average validity percent of 84% and 81% for time and cost contingency, respectively. The proposed model allows the owners to [1] understand the effect of the project different factors on the contingency values, which in turn represent the degree of risk involved and accordingly, allows the owner to take necessary measures at the preconstruction stage to reduce the risks, [2] minimize the cost and time overrun through setting the right amount of contingency, [3] avoid tie up of excessive funds for the project, which can be used in others projects or activities, and [4] have higher confidence during the decision making process of whether to proceed or not to proceed with the project

A Study of Risk-Taking Behavior in Investment Banking

This dissertation examines corporate risk-taking behavior by investment banks in the United States. This study was sparked by the collapse of Lehman Brothers, one of the largest bankruptcy filings in U.S. history. This dissertation examines the specific factors that drove investment banks such as Lehman Brothers to take excessive risks, and how the deregulation of the US financial services industry towards the end of the 1990s contributed to risk-taking behavior. I use four theoretical perspectives to examine corporate risk-taking behavior among investment banks. These perspectives include: institutional theory, behavioral theory of the firm, knowledge based view (KBV) of the firm, and agency theory. Risk research in strategic management has mostly tended to adopt three theoretical perspectives: behavioral theory of the firm (Cyert & March, 1963), prospect theory (Kahneman & Tversky, 1979), and agency theory (Jensen & Meckling, 1976). I included institutional theory and KBV perspectives because numerous studies suggest that the regulatory environment (Scott, 2003) and knowledge base of a firm (Grant, 1996b) matters in corporate risk-taking. A review of the practitioner literature also suggests that regulatory frameworks and lack of firm competence have played a role in firm risk-taking behavior (Pirson & Turnbull, 2011; Summers, 2011; Wallison, 2011). My analysis suggests that both external and internal factors were associated with excessive corporate risk-taking among investment banks. External factors associated with firm risk-taking include the institutional environment, such as regulation (or absence thereof). Internal factors associated with firm risk-taking include aspirations of executives, level of corporate diversification, knowledge base of company, number of interlocking directorships in the board, size of the board, ratio of insiders to outsiders on the board, and ownership of the stock by board members of investment banks. The findings of this study contribute to the literature on corporate risk-taking behavior, and suggest that the study of such a complex phenomenon as corporate-risk taking needs to be done using multiple theoretical perspectives

The Application Of Insurance As A Risk Management Tool For Alternative Dispute Resolution (ADR) Implementation In Construction Disputes

In modern days, construction projects have become more and more complex and intriguing. One source of the complexity arises from the large number of parties involved. This is especially the case for large-scale construction projects. Because of such complexity, disputes are almost inevitable and implementation costs associated with dispute resolution have become increasingly expensive. Because most projects operate on tight budgets, cost effective dispute resolution plays an important role in the success of a construction project. For this purpose, Alternative Dispute Resolution (ADR) techniques such as negotiation, mediation, and arbitration are being widely adopted in large-scale construction projects to resolve disputes in more effective and cost-saving ways. However, the risk of incurring dispute-related cost overruns always exists because of the uncertainty in the distribution of dispute occurrence and the effectiveness of contractually-predetermined ADR techniques. As a result, the traditional self-insured structure which simply retains all dispute resolution costs to the project through contingency fees is no longer considered economical. While many insurance policies cover the settlement of a dispute, such as professional liability insurance, no specific insurance policy is dedicated to cover the ADR implementation costs such as fees and expenses that are paid to the owner/contractor's employees, lawyers, claims consultants, third party neutrals, and other experts involved in the resolution process. To fill the gap, this dissertation proposes an insurance model to reduce the potential variations in the dispute resolution budget by pricing ADR techniques as an insurance product. It is designed to transfer the risk of dispute-related cost overruns from the project to a third-party insurance company. To achieve this goal, this dissertation focuses on three major tasks: 1) investigate the role of ADR implementation insurance in construction risk management, 2) construct a mathematical model to represent the risk attitudes of project participants using utility theory and derive the basic premium of ADR implementation insurance using insurance pricing theory, and 3) develops a comprehensive framework to determine the optimal insurance premium by considering two additional insurance limits a Deductible Limit (DL) and a Maximum Payment Limit (MPL). The objective of this dissertation is to provide project participants with an advantageous insurance policy that minimizes their total expected subjective loss. The model can serve as a decision-making support system to help project participants determine whether an ADR implementation insurance policy is attractive for a certain project. To illustrate the benefits of the proposed model, numerical examples are provided for simulation purpose. The results show that ADR implementation insurance, although not a tool to eliminate dispute resolution costs, is a powerful alternative in risk management to transfer the financial implications of ADR implementation risk to a third party

A Methodology for Project Risk Analysis using Bayesian Belief Networks within a Monte Carlo Simulation Environment

Projects are commonly over budget and behind schedule, to some extent because uncertainties are not accounted for in cost and schedule estimates. Research and practice is now addressing this problem, often by using Monte Carlo methods to simulate the effect of variances in work package costs and durations on total cost and date of completion. However, many such project risk approaches ignore the large impact of probabilistic correlation on work package cost and duration predictions. This dissertation presents a risk analysis methodology that integrates schedule and cost uncertainties considering the effect of correlations. Current approaches deal with correlation typically by using a correlation matrix in input parameters. This is conceptually correct, but the number of correlation coefficients to be estimated grows combinatorially with the number of variables. Moreover, if historical data are unavailable, the analyst is forced to elicit values for both the variances and the correlations from expert opinion. Most experts are not trained in probability and have difficulty quantifying correlations. An alternative is the integration of Bayesian belief networks (BBN's) within an integrated cost-schedule Monte Carlo simulation (MCS) model. BBN's can be used to implicitly generate dependency among risk factors and to examine non-additive impacts. The MCS is used to model independent events, which are propagated through BBN's to assess dependent posterior probabilities of cost and time to completion. BBN's can also include qualitative considerations and project characteristics when soft evidence is acquired. The approach builds on emerging methods of systems reliability

Utilization of the building information model in the operative procurement process of housing construction

Tämä diplomityö käsittelee tietomallien hyödyntämistä asuntorakentamisen operatiivisen eli projektikohtaisen hankinnan prosessissa. Diplomityön tavoitteena oli selvittää, miten tietomallia voitaisiin hyödyntää tehokkaammin tutkimuksen kohdeyrityksen hankintatoimessa. Hankintojen osuus rakennushankkeiden kokonaiskustannuksista on jatkuvassa kasvussa. Tällä hetkellä hankinnat muodostavat noin 60-80% osuuden rakennushankkeiden kokonaiskustannuksista. Näin ollen hankintojen onnistumisella on merkittävä rooli hankkeen taloudellisessa onnistumisessa. Hankintojen merkittävän taloudellisen vaikutuksen vuoksi rakennusliikkeet panostavat hankintojen kehittämiseen. Tietomallintaminen on yksi rakennusalan potentiaalisimmista kehityskohdista. Tietomallin sisältämää tietoa voidaan hyödyntää rakentamisen lisäksi myös hankinnoissa. Tutkimuksen kohdeyrityksessä tehtyjen selvitysten perusteella tietomallia ei vielä hyödynnetä tehokkaasti kohdeyrityksen hankintatoimessa. Perustajaurakoitavissa kohteissa rakennusliikkeellä on parhaat mahdollisuudet vaikuttaa hankkeen tietomallintamiseen, joten tutkimuksessa käsiteltiin tietomallintamista asuntorakentamisen ja perustajaurakoinnin näkökulmasta. Tutkimus toteutettiin kahdessa osassa. Ensimmäisessä osassa tutkittiin tietomallien hyödyntämisen nykytilannetta kohdeyrityksen hankintatoimessa kyselytutkimuksen avulla sekä kartoitettiin tietomallintamisen kehityskohtia haastattelututkimuksen avulla. Kyselytutkimus toteutettiin valtakunnallisesti koko kohdeyrityksen hankintahenkilöstölle sähköisenä verkkokyselynä. Haastattelututkimuksessa haastateltiin kaikkien operatiivisen hankintaprosessin osapuolten edustajia: suunnittelijat, suunnittelunohjaus, laskenta, hankinta, tuotanto ja alihankkijat. Haastattelututkimus toteutettiin case-projektin kontekstissa. Tutkimuksen jälkimmäisessä osassa tutkittiin kirjallisuustutkimuksen avulla talonrakentamisen hankintatoimea, tietomalleja rakennusalan kontekstissa sekä tietomallien hyödyntämistä rakennushankkeessa. Kirjallisuustutkimuksen avulla selvitettiin hankintojen erilaisia luokitteluja ja hankintojen merkitystä yrityksen liiketoiminnalle sekä kuvattiin hankinnan prosessi. Tietomallintamisen osalta kirjallisuustutkimuksen avulla selvitettiin tietomallipohjaisen suunnittelun ja perinteisen suunnittelun eroavaisuuksia sekä tietomallintamisen periaatteita, käytiin läpi Yleiset tietomallivaatimukset ja tietomallipohjaisen asuntorakennushankkeen kulku sekä tutkittiin tietomallien laadunvarmistuskeinoja, tietomallipohjaista määrälaskentaa ja tietomallien käyttöä perustajaurakoinnissa. Tutkimuksessa selvitettiin tietomallintamisen kehityskohdat, joihin panostamalla kohdeyrityksen hankintatoimessa pystytään hyödyntämään tietomalleja tulevaisuudessa tehokkaammin. Lisäksi tutkimuksessa selvitettiin kehityskohtien jatkokehitystarpeet, jatkokehitystarpeiden vaikutukset hankintaprosessin osapuoliin sekä hankinnan määrätietovaatimukset kymmenen taloudellisesti merkittävimmän hankintanimikkeen osalta. Tutkimuksessa esille nousseet tietomallintamisen kehityskohdat ovat: henkilöstön tietomalliosaaminen, tietomallipohjainen määrätieto, suunnitteluprosessi ja päätöksenteko, tietomalliohjeistus, sopimustekniset asiat, suunnitteluohjelmistot ja tietomallinnus, suunnitteluaikataulu, osapuolten motivaatio sekä palautteen antaminen. Tietomallien hyödyntämisessä hankintojen kannalta tärkeintä on tietomallipohjaisen määrätiedon luotettavuus ja oikea-aikaisuus. Jotta tietomallintamisen täysi potentiaali pystytään hankintaprosessissa hyödyntämään, tulee kaikilla hankintaprosessin osapuolilla olla valmiudet toimia tietomallipohjaisesti. Tietomallien tehokkaampi hyödyntäminen tulee olemaan pitkällisen kehitystyön tulos, mikä vaatii motivaatiota kaikilta prosessin osapuolilta

Planification tactique des grands projets d’ingénierie et de construction

RÉSUMÉ : Les grands projets d’ingénierie et de construction sont planifiés de façon hiérarchique afin de faire face à leur grande complexité. Ainsi, des échéanciers agrégés sont développés durant les premières phases de projet pour un large horizon et des échéanciers plus détaillés sont développés au fur et à mesure que le projet avance et que les informations se précisent. Les niveaux de planification agrégés sont caractérisés par des degrés élevés d’incertitude, notamment le niveau de planification tactique où des décisions importantes doivent toutefois être prises relativement à la détermination du budget de projet et des dates jalons et d’échéance. Au niveau de planification tactique, les pratiques courantes se basent sur l’ajout de sécurité dans les échéanciers tactiques de façon subjective et non fondée sur des méthodes scientifiques. Les niveaux d’agrégation sont également établis de façon arbitraire. Quant à la littérature scientifique, peu de modèles tactiques considérant l’incertitude ou évalués dans un contexte réaliste ont été proposés. En particulier, l’incertitude liée à l’agrégation des capacités est négligée dans la littérature. D’un autre côté, les hypothèses des approches proactives d’ordonnancement proposées pour le problème Resource Constrained Project Scheduling Problem (RCPSP) du niveau opérationnel ne sont pas adaptées aux hypothèses du problème Rough-Cut Capacity Planning (RCCP) du niveau tactique. Dans cette thèse, nous essayons de répondre à ces problématiques en proposant des approches de planification tactique adaptées au contexte complexe, incertain et dynamique des grands projets d’ingénierie et de construction. Nous commençons par proposer un modèle de base qui permet d’intégrer plusieurs niveaux d’agrégation des données à travers la variation des durées des périodes. L’évaluation des résultats dans un contexte incertain et dynamique a permis de relever d’une part l’avantage de l’agrégation des périodes dans la réduction considérable des temps de calcul et d’autre part l’impact négatif qu’elle engendre sur la robustesse des estimations. Nous avons proposé une approche de planification proactive destinée à la variante time-driven du problème RCCP facilement exploitable en pratique et qui permet d’améliorer grandement la robustesse du coût de projet estimé sous l’influence des incertitudes liées aux charges de travail et à l’agrégation des capacités. Nous avons également proposé des approches proactives destinées à la variante resource-driven du problème RCCP qui permettent d’améliorer la robustesse des dates jalons y compris la date d’échéance du projet sous l’influence des incertitudes citées plus haut. La comparaison de ces approches montre que la stratégie gagnante de protection des dates jalons contre les dépassements est de concentrer les marges de temps à la fin des chemins menant à ces dates.----------ABSTRACT : Large scale engineering and construction projects are planned hierarchically in order to face the high level of complexity inherent to them. As such, aggregate schedules are generated for a large horizon during the first phases of the project and detailed schedules are developed as the project advances and more accurate information becomes available. The aggregate planning levels are characterized by a high level of uncertainty, especially the tactical planning level where important decisions are made concerning the project budget, milestones and due dates. At the tactical planning level, common practices are based on adding security in tactical schedules in subjective and non-scientifically based ways. Aggregation levels are also arbitrarily established. As for the scientific literature, very few tactical planning models explicitly consider uncertainty or evaluate their models in a realistic context. In particular, the uncertainty related to the aggregation of capacity estimates is neglected in the literature. On the other hand, the proactive scheduling approaches intended for the Constrained Project Scheduling Problem (RCPSP) at the operational level are based on different hypotheses than the ones of the Rough-Cut Capacity Planning (RCCP) problem intended for the tactical planning level. In this thesis, we try to address these issues by proposing tactical planning approaches appropriate to the complex, uncertain and dynamic context of large scale engineering and construction projects. We begin by proposing a base model that integrates different planning levels by varying the durations of the periods. The results evaluation in an uncertain and dynamic environment shows the considerable reduction of the computational times when aggregating the periods while a decrease in the robustness of the estimations is noticed. We have therefore proposed an easily implementable proactive planning approach for the time-driven variant of the RCCP problem that considerably improves the robustness of cost estimations in presence of the uncertainties related to the aggregation of capacities and to work contents. We have also proposed a number of proactive approaches for the resource-driven variant of the RCCP problem that improve the robustness of project milestones including the due date of the project in the presence of the uncertainties cited above. The comparison of these approaches shows that the best protection strategy of the milestones against delays is to concentrate time buffers at the end of the paths leading to these milestones