P3 Toolkit

Analytical Tools

P3-VALUE: Risk Assessment Tool User Manual

April 19, 2013

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Chapter 8. Risk Assessment Outputs

The outputs of the risk assessment process can be applied to a cash flow model to allow project sponsors to estimate the risk-adjusted, net present cost of a project. In this way, outputs from the Risk Assessment Tool are used in the Public Sector Comparator Tool, the Shadow Bid Tool, and the Financial Assessment Tool to calculate the potential range of risk-adjusted net present costs of different project delivery methods, to determine whether a particular method offers Value for Money (see Figure 6).

Figure 6: Evaluation Process

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Risk Assessment Tool Outputs

In the Risk Tool, the results of the quantitative risk assessment and risk allocation steps feed into a Monte Carlo Simulation, which calculates total risk impacts. The simulation outputs are summarized in the 'Cost Impact Output' table and the 'Schedule Impact Output' table. The cost and schedule risk results are specified at the 10^th percentile (P10), 70^th percentile (P70), and 90^th percentile (P90) to show the range of possible outcomes. The 70^th percentile (P70) is the estimate that FHWA uses when conducting Cost Estimate Reviews (CERs) for major highway projects. The results are portrayed graphically in a distribution histogram with a cumulative distribution (or s-curve).

Figure 7 shows a sample distribution histogram and cumulative distribution. These charts are useful for selecting risk values for different confidence levels. In Figure 7, each vertical bar represents the discrete probability that a cost overrun of the amount on the x-axis will occur. The s-curve represents the cumulative probability that the value of risk will be equal to or less than the intercept on the x-axis. For example, according to Figure 7 there is 50 percent likelihood that cost overruns will be less than $110 million.

Figure 7: Probable Cost Overrun Chart

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Histograms are provided in 'Table 6: Cost Risk Sensitivity' and 'Table 8: Schedule Risk Sensitivity' to indicate which risks present the greatest average impact. ^[3] Figure 8 shows a sample impact bar graph. The histogram presents the most important risks by average cost impact. The example in Figure 8 indicates that Risk #9 - Right of Way/Utilities, has the greatest average impact on project costs. The Risk Tool generates the charts for both cost and schedule impacts. The dollar values of the schedule impacts are provided in the 'Schedule Impact Output' table.

Figure 8: Cost Risk Sensitivity Histogram

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The 'Cost Impact Output' and 'Schedule Impact Output' tables also display the aggregated allocation of risks between the public and the private sector. It is important to note that the allocation of cost impacts and schedule impacts may vary because they are evaluated independently during the quantitative assessment process and the impact of each risk on cost and schedule (and therefore the percentage of the total impact) may not be the same.

Using the Risk Assessment Tool

The Outputs tables present the results of the risk assessment process as cost impact values and schedule impact values by project phase as well as the percentage of risks allocated to the public and private entities. For each phase, the results include values at the 10th percentile, 70^th percentile, and 90th percentile.

The total risk impacts (both cost and schedule) are generated from a Monte Carlo simulation. To run the simulation, users must enter the number of iterations in the "Generate Outputs" section of the 'Cost Impact Output' table. The number of iterations must be between 300 and 1,000. Upon clicking "Run Simulation," the values calculate based on the number of iterations entered and the data entered in the 'Risk Register' table. Note that the accuracy of the simulation depends on the number of iterations and therefore a greater number of iterations will increase the likelihood that a "smooth" output distribution curve will form with risk probability estimates. Generally, a simulation for 300 iterations is completed within 30 seconds, while a simulation for 1,000 iterations is completed in 1-2 minutes.

The outputs are for educational purposes to give users a sense of the outcomes a risk assessment process may produce. The outputs would be used to prepare the project's risk-adjusted cash flows and to conduct a VfM analysis.

Integrating Outputs with other Evaluation Tools

To integrate the cost and schedule consequence outputs of the Risk Assessment Tool into project cash flow models, agencies must consider the timing of the risk impact on the project and evaluate the cost of risks for each project phase. This will allow agencies to appropriately discount the cost consequences of risks that occur in the future. The P10, P70 and P90 values and the percentage risk share displayed in the 'Cost Impact Output' table and the 'Schedule Impact Output' table are key inputs for the other P3-VALUE tools. The table below specifies the outputs that become key inputs for the other P3-VALUE tools. It is important to note that users must complete the risk register from the perspective of both the public and the private sector to obtain the separate outputs that become inputs into the PSC and Shadow Bid Tools respectively. The risk values used in the Financial Assessment Tool's viability evaluation should be from the public perspective.

Inflating Outputs in other Evaluation Tools

The Risk Assessment Tool does not include inflation assumptions like the PSC and Shadow Bid Tools do; therefore, the risk value outputs from the Risk Assessment Tool that feed into the PSC and Shadow Bid Tools are later inflated by those tools based on the user-defined inflation rates in those tools. Specifically, either the Consumer Price Index (CPI) or the Operations Phase Index applies to the operations phase risk values, while the Construction Phase Index applies to the design-build phase risk values.

Table 1: Integrating Risk Assessment Outputs with P3-VALUE Tools

OUTPUTS		INPUTS
Risk Assessment Tool		Public Sector Comparator Tool		Shadow Bid Tool		Financial Assessment Tool
Worksheet	Cell	Worksheet	Cell	Worksheet	Cell	Worksheet	Cell
Table 5 - Cost Impact Outputs	G16	Assumption	E80	Assumption	E103
Table 5 - Cost Impact Outputs	H16	Assumption	E81	Assumption	E104
Table 5 - Cost Impact Outputs	G17	Assumption	E82	Assumption	E105
Table 5 - Cost Impact Outputs	H17	Assumption	E83	Assumption	E106
Table 5 - Cost Impact Outputs	F26	Assumption	E86	Assumption	E109	Viability Evaluation - Assumption	E78
Table 5 - Cost Impact Outputs	G26	Assumption	F86	Assumption	F109	Viability Evaluation - Assumption	F78
Table 5 - Cost Impact Outputs	H26	Assumption	G86	Assumption	G109	Viability Evaluation - Assumption	G78
Table 5 - Cost Impact Outputs	F27	Assumption	E87	Assumption	E110	Viability Evaluation - Assumption	E79
Table 5 - Cost Impact Outputs	G27	Assumption	F87	Assumption	F110	Viability Evaluation - Assumption	F79
Table 5 - Cost Impact Outputs	H27	Assumption	G87	Assumption	G110	Viability Evaluation - Assumption	G79
Table 7-Schedule Impact Output	G18	Assumption	F80	Assumption	F103
Table 7-Schedule Impact Output	H18	Assumption	F81	Assumption	F104
Table 7-Schedule Impact Output	G19	Assumption	F82	Assumption	F105
Table 7-Schedule Impact Output	H19	Assumption	F83	Assumption	F106
Table 7-Schedule Impact Output	F38	Assumption	E88	Assumption	E111	Viability Evaluation - Assumption	E80
Table 7-Schedule Impact Output	G38	Assumption	F88	Assumption	F111	Viability Evaluation - Assumption	F80
Table 7-Schedule Impact Output	H38	Assumption	G88	Assumption	G111	Viability Evaluation - Assumption	G80
Table 7-Schedule Impact Output	F39	Assumption	E89	Assumption	E112	Viability Evaluation - Assumption	E81
Table 7-Schedule Impact Output	G39	Assumption	F89	Assumption	F112	Viability Evaluation - Assumption	F81
Table 7-Schedule Impact Output	H39	Assumption	G89	Assumption	G112	Viability Evaluation - Assumption	G81

Footnotes:

3. Office of Transportation Public-Private Partnership (PPTA), PPTA Risk Analysis Guidance
http://www.vappta.org/resources/PPTA%20Office%20Risk%20Guidance%20Document%20v2.1%2020110930.pdf

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