3.5.5 Integrated Cost / Schedule Risk Analysis

Abstract

AbstractProject costs often exceed their estimates because those estimates do not take into consideration the actual duration of project activities. Cost risk will also be underestimated if it does not take into consideration schedule risk. This paper presents a method of incorporating the uncertainty in activities' durations into the assessment of cost risk. In this method, a Monte Carlo simulation of the schedule provides uncertainty in time. Incorporating the schedule risk results into the cost risk model provides the linkage between schedule and cost risk. Then equivalence must be established between the schedule and network concepts. Uncertainty in costs is then represented by uncertainty in “independent costs” (costs that do not depend on time) and “variable costs” (costs that depend on uncertain time and cost per unit time or “burn rate” and rate of labor compensation.) Simulation of the cost model combines the results from the schedule risk analysis with the uncertainty in the cost assumptions. The results include the probability distribution of total project costs and sensitivity of that distribution to the different inputs. Issues are discussed and simplified examples are provided.