Chemical Engineering December 2014 - 38

Term
Risk
Table 1. SelecTed aace InTernaTIonal rISk TermInology (derIved from rP 10S-90) [1]
defInITIon
An uncertain event or condition that could affect a project objective or business goal
Base (point) estimate
Allowances
Contingency
Estimate including allowances, but excluding escalation, currency risk, contingency and
management reserves
Resources included in (base) estimates to cover the cost of known but undefined requirements
for an individual activity, work item, account or sub-account
An amount added to allow for items, conditions or events for which the state, occurrence or effect
is uncertain, and that experience shows will likely result, in aggregate, in additional costs
(excludes major scope changes, catastrophic risk events and conditions, escalation and
currency risk)
Management reserves An amount added to an estimate to allow for discretionary management purposes outside of
the defined scope of the project, as otherwise estimated. May include amounts that are within
the defined scope, but for which management does not want to fund as contingency, or that
cannot be effectively managed using contingency
Escalation
Accuracy range
A provision in costs or prices that accounts for uncertain changes in technical, economic and
market conditions over time. Inflation (or deflation) is a component of escalation
An expression of an estimate's predicted closeness to final actual costs or time. Typically expressed
as high or low percentages by which actual results will be over and under the estimate
(base or funded), along with the confidence interval that these percentages represent
Table 2. aace eSTImaTe claSSeS, delIverable STaTuS and range-of-rangeS (rP 18r-97) [2]
range-of-ranges
aace class key deliverable status
Class 5
Class 4
Class 3
Class 2
Class 1
Block flow agreed upon by stakeholders
Process flow diagrams issued for design
Process and instrumentation diagrams issued for design
All specifications and datasheets complete
Most or all engineering and design work complete
stance, stating that 80% of the time,
the project will be within these
bounds. Also important to specify is
the reference point that the range is
based upon - it can be relative to
the base estimate or to the funded
amount, including contingency.
Table 1 shows AACE International's
definitions from Recommended
Practice (RP) 10S-90 [1] of these
and other key risk terms.
Understand cost risk reality
Engineers need to know that there
are no " standard " estimate ranges.
AACE International's RP 18R-97
(18R) [2] specifically states that
an accuracy range must be " determined
through risk analysis, " because
every project's risk profile
is unique. RP 18R is designed to
support owner phase-gate scope
definition and decision-making
processes by defining " classes " of
estimates that align with typical
industry phasing. It provides a
" range-of-ranges " for estimate accuracy
based on different levels of
scope definition, as shown in Table
2. AACE's message regarding cost
risk is that we know in relative
terms that estimate accuracy will
improve as scope is better defined,
but in absolute terms we can't say
by how much without risk analysis;
risks vary too much between projects.
Further, RP 18R states that its
range-of-ranges excludes " extreme "
risks. It also assumes that realistic,
risk-based, unbiased contingency
has been applied. Therefore, RP
18R's ranges bracket the estimated
amount including contingency. Unfortunately,
many misquote AACE
as providing specific ranges. This
false belief that there are standard
ranges often shuts down effective
communication about risks. Accuracy
is not a measure of estimate
quality, it is a measure of risk.
The range-of-ranges in Table 2
are classified as low-end (p10) and
high-end (p90). These qualifiers
are confidence levels, which are the
low end (p10)
-50 to -20%
-30 to -15%
-20 to -10%
-15 to -5%
-10 to -3%
High end (p90)
+30 to +100%
+20 to +50%
+10 to +30%
+5 to +20%
+3 to +15%
percentage of probability (p) or confidence
that the outcome will be less
than the stated value.
So what are the industry accuracy
ranges for owners? Figure 1
shows the distribution of accuracy
outcomes for large CPI projects
(typically sanctioned at somewhat
better than Class 4 definition), excluding
major scope change and escalation.
The range is much wider,
and is biased much further to the
high side than the expectation of
most CPI engineers. For example,
the actual bandwidth is from about
-10% to +70%. Comparing that
width to the " worst case " in Table 2
for Class 4 of -15% to +50% highlights
the discrepancies. Further,
the shifted midpoint of the reality
curve (median 21% overrun of budget)
indicates that contingency is
underestimated by a factor of about
three. Here, 31% contingency was
needed at p50 on average, rather
than the 5-10% that industry
typically allows.
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