CRA~VE

An Integrated Process for Cost Risk

Analysis and Value Engineering

November 23 & 24, 2009

Agenda

¾ Why Risk Management?

¾ What is CRA~VE?
¾ CRA~VE Steps:
1. Baseline Risk Assessment
2. Value Engineering and Risk Response
3. Risk Analysis on Risk Response Strategies
4. Tracking, Monitoring and Control
¾ HDR and Risk Assessment

2
Overruns are a Reality!

¾ Over 40% of all infrastructure projects, and over 80% of

major infrastructure, exceed their budget or schedule
Examples of Project Cost Growth
262%

Reagan Bldg. & Trade Ctr. (Wash. D.C.)

233%

Chek Lap Kok Airport Rail Link (HK)

Sound Transit 22 mi. Light Rail (Seattle)

Los Angeles City Hall Retrofit

Staples Center Arena (Los Angeles)
No. Outfall Sewer (San Fernando Valley)

L.A. Convention Center Addition

202%
S.F. BART Extension to S.F. Int’l Airport

+200%
178%
Central Artery / Tunnel (Boston)

Coor’s Field (Denver)

165%
L.A. Metro Red Line (Segments 1, 2

L.A. Central Pub. Library Renovation

141%

El Toro “Y” Freeway Modification

Los Angeles Downtown Cathedral

Channel Tunnel
(Segment 3 No. Hollywood)

Eastside Reservoir Project

Denver International Airport

Getty Cultural Center, LA
& 3 No. Hollywood)

+100% 96%
(MWD of So. Calif.)
L.A. Metro Red Line

L.A. Coliseum Repair

Disney Concert Hall
81%
75% 76%
61% 67%
50% 50%
40%
25% 30%

11% 12% 14%

0%
M E M D E D I L E A E X U L L L L E O E L
Reference 1 - 31 -01 1 -11 -99 7 -1 -98 9 -6 -94 3 -1 - 99 9 -6 - 94 4 -3 -98 3 -19 -99 1 -8 -01 10 -12 -93 1 -3 -94 5 -92 2 -14 -96 1 -25 -98 12 - 8 -99 12 -16 -94 12 -97 4 -24 - 95 6 -7 -91 10 -19 -98 3 -5 -98

Orig. Est. 1311 1970 4007 109 1200 19 8000 250 2400 310 9210 123 1560 362 153 110 35 360 55 1500 45
(in $mil.)
Current Est.
or Actual (in 1311 2190 4502 125 1500 25 11200 375 3600 500 15350 215 2750 656 300 274 93 1000 166 5000 163
$mil.)

Prepared 2 - 26 -01 by LACMTA Construction Div. Program Mgmt.

New Realities

¾ With the current financial turmoil, funding constraints,

volatile commodity prices, and policy/regulation changes,
conventional planning methods are no longer sufficient
¾ Credible,
transparent, and comprehensive processes
become critical for effective infrastructure planning
¾ Credibility
means that decision-makers must know the
nature and magnitude of risks to determine their risk
tolerance so that they make effective decisions
Why Risk Management?

¾ Encourages being proactive and early planning

¾ Builds confidence and credibility in project’s plans and
estimates
¾ Helps to develop targeted mitigation strategies for all
anticipated threats
¾ Better allocation of risks and identification of project
delivery methods
¾ Ensures transparency, integrity, and accountability
throughout the life-cycle of the project

Maximizes the Likelihood of Meeting

On-Time & On-Budget Goals
What is CRA~VE?

¾ Integrated process of Cost Risk Analysis & Value

Engineering which identifies and quantifies opportunities
while accounting for risk
¾ CRA~VE involves the combination of process and tool for
the project team to:
ƒ Compare all possible alternatives and solutions suggested
or recommended by the value engineering team
ƒ Select the best alternative/solution
ƒ Generate better project cost and schedule forecasts for
budgeting and bonding
ƒ Obtain a quantified risk management plan for project
planning
ƒ Minimize overall project costs and risks
ƒ Provide a reality check on proposed innovations
Cost Risk Analysis Principles

IDENTIFY and VALIDATE RISKS

Avoid false precision; as big a problem as early
optimism “Approximately right is better than
precisely wrong”

QUANTIFY and COMMUNICATE RISKS

Relate “contingency” to everyday experiences with
uncertainty

MITIGATE RISKS
Invest in continuous and transparent QA/QC of
actual cost estimating process
Traditional vs. Risk-Based Estimation

Fixed Contingency % Geotech

20%
Materials
40%

Project Project Environmental

Requirements
Deterministic Base Cost 30%
Estimate

5%
Design
Uncertainty and Project Delivery

Actual
Cost

Planning Design Stages Construction Project

Stages Stage Completion
Project Life Cycle
CRA~VE Process - Key Steps
Step 1: Baseline Risk Assessment
™ Review Baseline Cost and Schedule
™ Identify and Quantify Risks Related to Baseline
Step 2: Value Engineering & Risk Response
™ Develop VE Recommendations to Mitigate/Avoid High Risks
™ Develop Recommendations that Add Value
Step 3: Risk Analysis on Response Strategies
™ Identify Risks Associated With Response Strategies
™ Quantify Threats and Opportunities
Step 4: Tracking, Monitoring, and Control
™ Identify Risk Owners, Monitoring Frequency
™ Continuously update risk management plan
™ Document and report progress CRA~VE
™ At Key Milestones, Update Cost and Schedule

10
CRA~VE Analytical Process

11
 Step 1: Baseline Risk Assessment
Review Baseline Schedule & Cost
Costs to date
Flowchart: I-5 Grand Mound To Maytown Widening
0 Design
Approval North End North End
Design 4 (Maytown) (Maytown)
Documentation/ Bridge Bridge
PFA 1 (12 months) STAGE 1 STAGE 2 21
16 (10 months) (7 months)
Access Environmental Permits
Evaluation 2 5 (12 months)
(9 months)
North End (Maytown)
Road Median Widening North End North End
Environmental R/W Acquisition 17 (6 months) (Maytown) (Maytown)
Documentation 3 6 (12 months) Road Road
(14 months) West Side and Bridge
Widening STAGE 3
22 26
Wetland Mitigation (3 months) (7 months)
7 (8 months)
R/W SRA Utilities
Certification 23 (6 months)
10

Hydraulics Report
8 (12 months)
AD
15 Scatter Creek Area Scatter Creek Area Final
STAGE 1 Scatter Creek Area STAGE 3 Overlay
Geotechnical 30 (7 months) STAGE 2 32 (6 months) 33
9 (18 months) 31 (6 months) (3 months)

PS&E South End

11 (15 months) (Grand Mound)
STAGE 1
19 (8 months)* South End South End
(Grand Mound) (Grand Mound)
RR Agreement STAGE 2
12 (6 months) STAGE 3
25 (6 months) 29 (9 months)

Agency Agreements
13 (9 months) Replace 12/118 & Replace 12/118 &
Widen 12/117 STAGE 1 Widen 12/117 STAGE 2
20 (8 months) 20b (8 months)
Other Agreements
14 (6 months)

3/06 9/06 9/07 1/08 4/08 9/08 1/09 7/09 1/10 4/10
Note: Not to Scale
(1) Assume single design/bid/build contract FISH WINDOWS
(2) Construction closure periods: Fish windows for activities (?) Winter weather shutdown (?) *Accelerated Process

12
Step 1: Baseline Risk Assessment
Integrating CRA and VE
Step 1: Baseline Risk Assessment
Risk Categories

¾ Budget Risk:
• Risk that budget elements will deviate from the estimate
• Examples: material price escalation, limited competition, labor
shortage

¾ Event Risk:
• Risk of internal or external events that force the project team to
work beyond the estimate just to meet the Project Scope and
Statement of Work.
• Examples: Environmental challenges, unforeseen subsurface
conditions, extreme weather, public pressure, public resistance

¾ Scope Risk:
• Risk of significant changes to project scope due to external
pressures.
• Examples: stakeholder pressure for a grander facility than the
budget accommodates, additions to meet permitting agency
demands
Step 1: Baseline Risk Assessment
Deriving Project-Specific Budget Escalation

Project-Specific
Escalation

240
Forecast ->
220 Median

200 Upper 10%

<- Actual
Index (2000 = 100.0)

Lower 10%
180

160

140

120

100

80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Year
15
 Step 1: Baseline Risk Assessment
Examples of Event and Scope Risks

¾ Environmental Risks
CRAVE™
¾Hazmat
Process: Step 1
¾
Identifying
Utilities Risks the risks by category
¾ Drainage Risks
¾ Traffic Management
¾ Market Conditions Risks
¾ Procurement Risks
¾ Right of Way Risks
¾ Performance Standards
¾ Financial Risks
¾ Natural Disasters
¾ Etc.
16
Step 1: Baseline Risk Assessment
Risk Analysis Workshop - Consensus Based Forum

¾ Review and validate cost &

schedule estimates
¾ Identify and quantify potential
risks
¾ Develop mitigation strategies
¾ Expert panel consists of project
team leads representing expertise
such as:
• Environmental
• Right of Way
• Geotechnical
• Utilities
• Construction
• Political and Public Relations
• Etc.
 Step 1: Baseline Risk Assessment
Quantifying Individual Risks
Risk Factor Probability of Potential Effects
Occurrence

Cost Schedule
Delay of NEPA Increase Delay by 12
Process
33% $2M months

Incremental Incremental
Increase Cost Schedule
Delay
Overall Effect on
the
Project Cost

18
Step 1: Baseline Risk Assessment
Establishing Ranges for All Key Input Variables

Labour Rate ($/Hour)

Median 10% Lower 10% Upper
$50 $45 $75

80% Confidence
0.25
Interval
PROBABILITY DENSITY

0.2

0.15

0.1

0.05

0
0 2 4 6 8 10 12 14 16
Value of Time – Auto Driver or Passenger, 4/hour
Step 1: Baseline Risk Assessment
Identify, Quantify and Mitigate…
Step 1: Baseline Risk Assessment
Risk Register: Risk Identification
Step 1: Baseline Risk Assessment
Risk Register: Risk Quantification
Step 1: Baseline Risk Assessment
Risk Register: Risk Mitigation
Step 1: Baseline Risk Assessment
Integrating Individual Risks

Budget & Scope Risks Event Risks

Engineering & Environmental Archeology

Project Schedule & Cost Construction
Final Design Quantities
Environmental
Construction Management Utilities
Engineering
Right of Way
Executive
Subgrade Construction Funding
Cost Escalation
Geotechnical
Track Construction
Hydrology
Separate Access Road Materials

Bridges / Structures Maintenance

Operations
Signals / Communications Project Cost by Segment and Overall
Permits
Prices
Buildings / Shops Right of Way
Schedule
Project Viability

24
Step 1: Baseline Risk Assessment
Risk-Adjusted Schedule
RISK-ADJUSTED CONSTRUCTION START & END DATES
UNDER DESIGN-BID-BUILD

100% May-2011 Oct-2014

May-2010 May-2011 Sep-2012 Oct-2014

90% May-2011 Oct-2014

May-2011 Oct-2014

80% May-2011 Oct-2014

Winter
May-2011 Shutdown Sep-2014

70% Oct-2010 Jul-2014

Sep-2010 May-2014
Probability of Not Exceeding

60% Jul-2010 Oct-2013

Jun-2010 Sep-2013

50% Jun-2010 Aug-2013

May-2010 Aug-2013

40% May-2010 Jul-2013

May-2010 Jul-2013

30% May-2010 Jun-2013

May-2010 Jun-2013

20% May-2010 May-2013

May-2010 May-2013

10% May-2010 Oct-2012

May-2010 Oct-2012

0% May-2010 Aug-2012
Jan-2009 Jul-2009 Jan-2010 Jul-2010 Jan-2011 Jul-2011 Jan-2012 Jul-2012 Jan-2013 Jul-2013 Jan-2014 Jul-2014 Jan-2015

Baseline Construction Start RA Construction Start Date Baseline Construction End RA Construction End Date
25
Step 1: Baseline Risk Assessment
Under Different Procurement Alternatives
RISK-ADJUSTED CONSTRUCTION START & END DATES
UNDER ALTERNATIVE DELIVERY

100% Jul-2010 Sep-2014

May-2009 May-2010 Sep-2011 Oct-2013

90% May-2010 Aug-2013

May-2010 Aug-2013

80% May-2010 Jul-2013

May-2010 Jul-2013

70% May-2010 Winter Jun-2013

Shutdown
Oct-2009 Jun-2013
Probability of Not Exceeding

60% Oct-2009 May-2013

Sep-2009 May-2013

50% Aug-2009 Oct-2012

Jul-2009 Oct-2012

40% Jul-2009 Sep-2012

Jun-2009 Sep-2012

30% Jun-2009 Aug-2012

May-2009 Aug-2012

20% May-2009 Jul-2012

May-2009 Jun-2012

10% May-2009 Jun-2012

May-2009 May-2012

0% May-2009 Aug-2011
Jan-2009 Jul-2009 Jan-2010 Jul-2010 Jan-2011 Jul-2011 Jan-2012 Jul-2012 Jan-2013 Jul-2013 Jan-2014 Jul-2014 Jan-2015

Baseline Construction Start RA Construction Start Date Baseline Construction End RA Construction End Date

26
Step 1: Baseline Risk Assessment
Risk-Adjusted Cost

RISK-ADJUSTED PROJECT COSTS

UNDER ALTERNATIVE DELIVERY

Baseline Construction Cost, Non-Escalated Baseline Construction Cost, Escalated Baseline Project Costs (excluding iCap, Con & Equip)
Project Cost With Budget Risks, Escalated Project Cost With ALL Risks, Escalated

100% $69.4 $95.5

$43.3 $44.1 $53.3 $63.6 $79.0
90% $62.4 $76.7
$61.5 $75.3
80% $60.8 $74.1
$60.3 $73.2
Cost Non-Construction Budget Event & Scope
Probability of Not Exceeding

70% $59.8 $72.4

Escalation Costs Risks Risks
$59.3 $71.7
60% $58.9 $70.9
$58.5 $70.3
50% $58.1 $69.7
$57.7 $69.1
40% $57.3 $68.5
$56.9 $67.9
30% $56.5 $67.3
$56.1 $66.6
20% $55.7 $65.8
$55.2 $64.9
10% $54.7 $63.9
$54.0 $62.3
0% $51.1 $55.8
$30 $40 $50 $60 $70 $80 $90 $100 $110

Cost ($Millions)

27
Step 1: Baseline Risk Assessment
Prioritization of Risks
Step 2: VE & Risk Response
Focused Risk Responses

¾ Avoidance is a change to the project

scope to eliminate the impact of a risk
Other 7%

¾ Transference of a risk to another

party who is more capable at handling
Utilities 3%

the risk (such as the contractor or

insurance company)
Geotechnical 3%
Market Conditions 5%
Construction 26%

¾ Mitigation is seeking to lessen the

impact of a specific risk items, which
Traffic 7%
$277.0 M
Expected

may involve the consumption of Hazardous Waste 8%

Value Risk

additional time and/or money Right of Way 22%

Design 19%

¾ Acceptance is recognition by the

project team of a specific risk and
decision to not take action to deal
with the risk
Step 2: VE & Risk Response
Value Engineering Assessment

Project Review
Assessment
• High cost areas
• Generate ideas
Screening
• Evaluate ideas

• Quantify Ideas

Recommendations
Step 2: VE & Risk Response
Developing Risk Response Strategies
Risk ID: C3 - E
Risk Name: Defective work results in schedule delay and additional costs
Activity Impacted: 27
Type of Risk: Schedule
Expected Value Total Risk Impact ($M): $3.40
Panelist Comments from Initial Risk Workshop: Would require a change order, may extend the length of
the contract.
Risk Response Strategy (select one):□ Avoid □ Transfer x Mitigate □ Accept
Notes on Strategy:
•Require schedule recovery whenever the Contractor’s CPM begins to fall behind
•Use incentive/disincentive clause to encourage contract to be completed on time
•Consider A+B bidding for these projects
•Add additional inspection
Cost to Mitigate ($M): ____________$1.0_to $2.0________
Impact
Risk Profile Prob.
Low Median High

Cost Risk ($) n/a n/a n/a

50%
Schedule Risk (Months) 2 3 18

Mitigated Mitigated Impact

Mitigated Risk Profile
Prob. Low Median High

Cost Risk ($) n/a n/a n/a

10%
Schedule Risk (Months) 1 4 6
31
Step 3: Risk Analysis on Response Strategies
Quantification of Mitigation Impact for Each Risk

Hz1: Delay of Right of Entry to Sample Site (15,18) $6.1 $6.1

D15: Changes in structures design (9) $2.0 $6.0

Hz4: May need to engage with Water Board and/or DTSC (15, 18) $2.4 $4.0

D4: Delay in bridge site submittal holds up structures design start (9) $1.9 $3.8

D21: Perched Contaminated water above aquifer may require

alteration of structures and wall foundation design (9)
$1.5 $2.9

C3: Defective work results in schedule delay and additional costs (27) $0.2 $2.5

En33: Cities request upgrade to drainage systems (2) $1.2 $2.0

Rw10: Delay to Start of ROW Activities (11) $1.9 $1.9

Ge1: Geotechnical surveys in contaminated area requires contract

Mitigated Impact
drilling (8)
$0.9 $1.9
Non-Mitigated
Impact
C6: Material availability (27) $1.2 $1.8

$0.0 $1.0 $2.0 $3.0 $4.0 $5.0 $6.0 $7.0

Millions
Expected Increase in Cost

32
Step 3: Risk Analysis on Response Strategies
Quantifying Mitigation Strategies at the Project Level

Mitigation
Value

33
Step 3: Risk Analysis on Response Strategies
Assessment of Alternatives

100%

SPCS Casting Basin – Grays Harbor

90% SPCS Casting Basin – Mats Mats
SPCS Casting Basin – Other Puget Sound Site
SPCS Alternative – Puget Sound Site, Barge Launch
80% SPCS Alternative – Puget Sound Site, Super Flood
Probability of Not Exceeding

SPCS Alternative – Columbia River, Barge Launch

Bridge Site Pontoon Construction – Sequential Casting, Launch Pontoons
70% Bridge Site Pontoon Construction – Vertical Construction in Water
Bridge Site Pontoon Construction – Barge/Dock at Bridge Site

60%

50%

40%

30%

20%

10%

0%
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00

Overall Cost Risk Index

 Step 4: Tracking, Monitoring and Control
Tracking, Monitoring, and Control

35
 Step 4: Tracking, Monitoring and Control
Informed Risk Allocation

MTO

Contractors
do not take
risks
They Price It

36
P3: Looking for Win-Win

Government Partners Private

Public Corporate Corporate
Public Public Net Corporate
Expenditure/ Expenditure/ Net
Benefits Benefits Benefits
Investment Investment Benefits
Private: 0 - $88 M $65 M ($23 M)
P3: $51 M $90 M $39 M $37 M $65 M $28 M

Basis for P3 Arrangement

 Step 4: Tracking, Monitoring and Control
Adequate and Continuous Reporting

38
HDR and Risk Assessment
¾ Conducted 500+ economic and financial studies in past 20
years
¾ Trustedby bond issuers and insurers; federal,
provincial/state and local agencies
¾ Risk-basedmodels for Transport Canada, FTA, FHWA, FRA,
FAA, DOJ, and DHS that have been submitted to
congressional committees, GAO and OMB
¾ Risk-based cost benefit analysis models for the Port
Authority of NY / NJ, Metrolinx, Move Ontario 2020, City of
London, City of Winnipeg, Vancouver to assess infrastructure
investments
HDR and Cost Risk Assessment
¾ Conducted cost risk analysis for various infrastructure
investment including bridges, highways, rail alignments,
ports, airports, tunnels, water treatment facilities, and
convention centers
¾ Led risk analysis studies for transportation agencies, such as
Caltrans, WSDOT, MNDOT, WISDOT, FDOT, UDOT,
TXDOT, ADOT and the FTA including Lower Manhattan
Recovery Office in New York City
¾ Conducted program cost risk analysis for a $35 billion
program by New York Dept. of Environmental Protection.
¾ Riskanalysis for over $10 billion rebuild program in New
Orleans on behalf of the US Army Corps of Engineers
Questions?

“Probabilities direct the conduct of the wise person”

Cicero
41
Backup
CRAVE™ Process: Step 1
Non-Mitigated Risk-Adjusted Cost Estimates
RISK ANALYSIS OF TOTAL PROJECT COSTS
Probability of Not Exceeding

100% $281.5
$255.1
90% $247.7
Baseline Baseline
Non-Escalated Escalated $242.0
80% $236.9
$150.3 $172.8 $232.7
70%
$228.9
$226.1
60% BID PRICE
$223.3
02/07 ($219 M)
50% $220.5
$217.5
40% $214.9
$212.0
30% $209.3
$206.2
20%
$202.7

$199.6
10%
$195.9

0% $192.3
$186.9
$170.9

$135 $155 $175 $195 $215 $235 $255 $275 $295 $315

Total Project Cost ($Millions)

43
CRAVE™ Process: Step 1
Non-Mitigated Risk-Adjusted Schedule Projection
 Cash Flow Analysis

1-5 Grand Mount to Maytown Widening

CUMULATIVE CASH FLOW – Most Likely Outcome
$100,000,000

$90,000,000
Construction
ROW
$80,000.000
Project Development

$70,000,000

$60,000,000

$50,000,000

$40,000,000

$30,000,000

$20,000,000

$10,000,000

$0

Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11
 35
Examples of Risk Mitigation

¾ Modified contract packages and terms

¾ Early purchase of critical or long-lead items
¾ Early purchase of Right-of-Way or lease of staging
areas
¾ Additional geotechnical investigation to better
define risk
¾ Enhanced public participation
¾ Negotiating community agreements upfront
 51
Identification of Key Cost Risks

Note: This chart is based solely on the risk register: for each event risk, the expected cost
impact is calculated as the product of the probability of occurrence times the cost estimate,
both provided by the panelists.