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P3 Toolkit

Analytical Tools

P3-VALUE: Risk Assessment Tool User Manual

December 30, 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

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 10th percentile (P10), 70th percentile (P70), and 90th percentile (P90) to show the range of possible outcomes. The 70th 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

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

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, 70th 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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