Integrated Cost and Schedule Risk Analysis
Introduction
Over the years, the process of analyzing projects cost did not take into accounts an explicit reference or any reference to the project schedules and its risk. As organizations witnessed numerous risks in their projects implementation, a great emphasis on risk awareness and analysis was made. As a result, project managers created an integrated cost-schedule risk analysis to create the need of viewing the risk analysis as a crucial input when making key projects decisions (Hulett & Campbell, 2002).
In this paper, we explain important concepts on schedule risk and overall cost. The paper explains the importance of integration of cost and schedule risk when developing project budgets and cost probability distributions. Also, it evaluates the differences between time-dependent and time-independent resources. Furthermore, the paper analyzes an example of both cost and schedule risk and how they might affect an individual project activity individually. The paper winds up by describing how integrating cost and schedule risk affect overall project costs.
Relationship between Schedule Risk and Overall Cost
The achievement of the project plans depends on numerous factors. Primarily, the cost of the project plan will influence whether the project will be achieved and the duration that will be taken to accomplish the project plan. Besides, the project plan will have some aspects of uncertainty associated with it; due to this uncertainty, the project managers have to incur some costs in managing the uncertainty. Schedule risk is a technique that recognizes the uncertainty and replaces the deterministic duration for every activity by a distribution that represents a wide range of certain events (Six, 2012).
Importance of Integrating Cost and Schedule Risk When Developing Project Budgets and Cost Probability Distributions
Cost-risk Management
An integrated cost and schedule risk promotes an efficient cost-risk management process. Essentially, it incorporates the risk management process using the risks identified in the list of the project risks and the cost estimates. An integrated cost-risk schedule management is carried out throughout the life cycle of the project, which enables the project managers and decision makers efficiently identify, quantify, and manage the cost risks throughout the project (Woodward, 1998).
Cost-Risk Assessment
Cost Estimating Risk
Cost estimating risk entails various factors that incorporate cost estimating errors, rate uncertainties, and statistical uncertainty that is inherent in the project analysis. To promote a sound cost estimation risk procedure, cost and risk schedule need to be considered to formulate an accurate view of the project risk.
Difference between Time-Dependent and Time-Independent Resources
Time is a precious factor that has to be taken into account in the analysis of the projects. In most cases, projects are conducted using resources that end up costing more if they work for a longer duration. Risk analyses on the estimate of costs are done through a schedule on resource project that considers time dependent and time independent resources (Hulett, n. d). Time-dependent resources are those resources that will incur a higher cost if the project takes a longer time. It includes labour or rented materials, equipment type resources and supporting resources like project management team (Hulett, n. d). On the other hand, time-independent resources take into account purchased equipment and raw materials. Also, it includes procured equipments that might incur risky costs.
Example of Both Cost and Schedule Risk and How They Might Affect an Individual Project Activity Individually
Cost and Risk Schedule Using a Schedule With Detail and Summary Activities
Figure 1: Example of Construction Cost and Risk Schedule by David Hulett (n.d).
How Cost and Risk Schedule Might Affect an Individual Project Activity Individually
The approval process may take a long time.
The design complexity may challenge the engineers.
The equipment supplier may be busy
Capable management may not be assigned in the construction of the facility
The procurement of the initial equipment may be slow
Activity duration estimates may be inaccurate
Cost estimates may be inaccurate
How Integrating Cost and Schedule Risk Affect Overall Project Costs
Often, the cost of the project exceeds the estimated amount since the estimates fail to take into account the uncertainties and risks in the estimates of the entire period of project activities. Thus, accounting the risk is highly crucial to develop more accurate estimates of the overall project costs. Ideally, the overall cost can be estimated most accurately and completely understood if it considers the schedule risk. To minimize on overall cost and save on time, project managers need to consider the impact of uncertainty on the overall cost. A risk schedule allows the project managers to increase the overall cost to accommodate the cost contingency and to provide uncertainty of the cost required to complete the project (Monaco & White, 2006).
Developing a risk schedule is a right platform to estimate the cost of the project with a probability distribution to a project plan such as schedule or cost-loaded schedule that may become affected by risks and uncertainties. Without a schedule risk analysis, projects are bound to fails regardless of the sophisticated tools and staff training the organization has had since the overall cost estimates do not take into account how much schedule as well as cost contingency required to attaining the desired level of certainty of the project.
An integrated cost-schedule risk analysis has an effect on the cost contingency that has to be identified and estimated when the overall cost estimates are presented to the management. Since costs are allocated to various projects activities without to account for risks, the cost-risk estimation approaches will allow for estimation and selection of proper contingency on the overall cost (Smith, 2013). If the risk fails to occur or incur a less cost effect than anticipated cost, the overall cost contingency assigned would be too large, though the project managers may apply it. On the other hand, if the risk incurs a much higher impact than anticipated, the overall cost contingency would be too small, and the project managers will need to allocate more cost.
References
Hulett, D. (n.d). Integrated cost-schedule risk analysis - Hulett & associates - project risk management. Retrieved June 6, 2016, from http://www.projectrisk.com/cost-schedule_risk_analysis.html
Hulett, D. T., & Campbell, B. (2002). 3.5.5 Integrated cost / schedule risk analysis. INCOSE International Symposium, 12(1), 943–951.
Monaco, J. V., & White, E. D. (2006). Extending cost growth estimation to predict schedule risk. The Journal of Cost Analysis & Management, 8(1), 1–13.
Smith, N. J. (2013). Book review: Integrated Cost–Schedule risk analysis. Proceedings of the ICE - Management, Procurement and Law, 166(3), 162–162.
Six, T. (2012, February 2). Schedule risk analysis: What is it and why do it? Retrieved June 6, 2016, from https://tensix.com/2012/02/schedule-risk-analysis-what-is-it-and-why-do-it/
Woodward, J. F. (1998). Effective project management through applied cost and schedule control. International Journal of Project Management, 16(2), 130.
