Cost Risk Analysis: Back Allocation Among the Elements

1
Cost Risk AnalysisBack Allocation Among the
Elements

• Presented by
• Marc Rose, MCR Federal, LLC
• mrose_at_mcri.com

SCEA National Conference Manhattan Beach, CA 15
June, 2004 Developed under the FAA SETA II
Contract
2
Agenda

• Overview
• Brief description of Cost Risk Analysis
• Various Allocation Methods
• Why Worry About Allocation?
• Proposed Methodology
• Conclusions

3
Overview

• What is Cost Risk Analysis
• Sum of cost elements (Ci) each with an associated
  probability distribution
• C1 Triangular Distribution
• C2 Normal Distribution
• Cost C1C2
• Determine High Confidence Cost (e.g., 80th
  Percentile) usually via Monte-Carlo simulation
  (e.g., Crystal Ball )
• Then Allocate the Risk dollars among the
  elements

4
Various Allocation Methods

• First Order Methods Scaling with
• Mode or Point Estimate (most common)
• Mean, Median
• Second Order Methods
• Mean Standard Deviation
• Mean Variance
• 80th Percentile Point Estimate
• Proposed Methodology
• Median with High Confidence Value (e.g., 80th)

5
Allocating Risk DollarsWhy Do We Care an
example

• Example 2 Elements with triangular
  distributions
• Capital (10, 20, 100)
• Operations (10, 20, 30)

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Why We Care Continued

• Solving for the High Confidence Value
• High Confidence (80th) Cost 83.0
• Apply Mode (Most Likely) Scaling
• Capital 41.5, Ops 41.5
• Operations is given more than it can spend
• Result is outside the distribution range
  (non-viable)
• Capital has only a 50 chance of success

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Proposed Methodology- (Median_P)

• Use the selected confidence level with the
  median
• From the previous example using the 80th
  percentile
• Operations 20(23.675-20)/(3.67522.05)(83-60)
  23.3
• Capital 40(62.05-40)/(3.67522.05)(83-60)
  59.7
• This corresponds to a 77.5 probability of
  success for each element and an overall
  confidence of 80

Scale with median directly if 50 is chosen
confidence level
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Risk Allocation Summary

• There is no correct allocation
• This is a statistical process, it is not possible
  to know which elements will go well, which bad
• Often additional information will result in
  modifications (e.g., knowledge of the budget)
• There are incorrect allocations
• Allocations with results outside of the viable
  range of values

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Risk Allocation Summary

• The Median_P methodology is guaranteed to produce
  viable results
• Has to fall between the selected confidence level
  and the median
• Results are consistently close to providing the
  same probability of success among the cost
  elements