Managing project cost blowout with probabilistic cost risk modeling

Accurately forecasting the total project life cycle cost for environmental risk can be a significant challenge – especially when you consider that incomplete or inadequate assessment of a development’s above and below ground risk can contribute to substantial time and cost blowouts.

Large tracts of industrial land, state assets and other inner city sites are making way for new high density living developments. An understanding of a site’s former life and its implications for future development are a must. 

When there’s a range of issues and challenges presenting themselves on site, a one size fits all remediation approach is not appropriate – nor is a single point cost estimate.

So it’s worth considering a multiple-point cost estimate for environmental remediation cost from the outset of a project.

Single point cost estimates versus probability simulation

Traditionally, consultancies and contractors have used what are known as straight-line estimates, or single-point cost estimates. This method is more than adequate for traditional cost estimation models, however it has a key flaw – the assumption of no volatility in scope or cost.

Probability simulation, also referred to as a multiple-point cost estimate, recognises the impact of risk and uncertainty in financial cost models. This can be applied to estimating environmental remediation cost.

Increase the understanding of probable costs and subsequent control of project risk

You can't know with absolute certainty what the actual value of a project will be – but based on historical data, expertise in the field and past experience, you can build a comprehensive estimate.

Multiple-point cost estimates are generally suited to portfolios of blocks or sites where risk may be apportioned across a range of sites with different issues and different remediation approaches. 

Multiple-point cost estimates are generally suited to portfolios of blocks or sites where risk may be apportioned across a range of sites with different issues and different remediation approaches. Presentation of multiple-point cost estimates requires thorough communication of potential scenarios, the likelihood of various outcomes and the costs that each of these would incur.

When developing a multiple-point cost estimate, certain assumptions need to be made. These might be assumptions about the variables to the scope of works, the extent of contamination in the vertical or horizontal planes, the extent of impact to groundwater aquifers, the cost of project management or the time to complete certain tasks.

Multi-point cost estimates are built upon existing information and are subject to risk appetite. If available information isn’t sufficient, additional data may need to be collected through limited intrusive works.

This estimate still contains an unknown value, and therefore some inherent uncertainty and risk – it does, however, allow for the development of a model to assess and communicate complexities.

A probabilistic risk assessment tool can be used to model variable parameters in cost estimates. This allows each significant variable parameter to be characterised with a probability curve.

The modelling develops a greater understanding of options through visualising probable costs and subsequent control of project risk which can be shared appropriately for project and profit share.

The portfolio cost estimates provided by this modelling tool better represent the range of plausible costs that could be accrued. It offers a comparison of risk and cost based on likely remediation methods – eliminating an over estimate of risk based on compounding high estimates, and avoids simplistic single estimates that don’t provide an understanding of potential higher costs.

How we can help

Probability simulation is one technique used by Coffey to recognise the impact of risk and uncertainty in financial cost models for estimating environmental remediation cost.

An urban renewal development can have many hidden or complex legacy environmental issues, each of which may require different remediation approaches. As a result one single cost model cannot account for all variables.

Our remediation team understands the complexities and can provide advice on necessary environmental remediation – building this advice into a probabilistic cost model to ensure that our clients are able to assess all remediation options and cost variables.

If you’re interested in discussing this topic please contact Lawrence Smith.

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