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Questions and Answers - P3 Project Risk Assessment

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Homework Assignment 4: Risk Assessment for a Non-tolled Project - Assessing Risk
Webinar recording: Audio

P3-VALUE Webinar - September 20, 2013

Patrick DeCorla-Souza
P3 Program Manager

Questions & Answers

1. You mentioned an earthquake risk event but this is a very low probability, very high impact event so why model it?

Normally you wouldn't model an earthquake event because it's certainly hard to predict and the impacts can vary greatly obviously. But there are some events and I think you'll talk about these later that have low probability and high impact like for example finding archeological sites. You know, if you had no idea there was no surveys done or anything but you sort of knew that the area could potentially have an archeological site, you may assign a low risk, low percentage, and low chance of that occurring but then it obviously would have some significant schedule impacts and I've seen things like that modeled before. But no I agree with you on the earthquake and probably not something you would model as a project risk.

2. What type of risk is covered by management reserve?

Normally those are your unknown-unknown risks that you are talking about. There was I'll use an example of let me think of a good one. I'll use a simple example, not from a major project or anything but you may be doing work and you are doing a lot of earth work in the area and the houses next to you have in-ground swimming pools and because it's a high profile project and dirt is getting in everybody's swimming pools. You're going to have to go out and buy pool covers for some of the people there. So that couldn't have been predicted. Normally it's not predicted. Usually management reserves cover those for the political risks not related to the project but something that's made at an executive level so that could be an example. Another example is you are doing a project and you're having a significant impact on the city transit to city bus system and they have to make some adjustments in the routes and move some bus stops or whatever and again, it's as a result of the project. Again those decisions are usually made at a higher level so normally for the large complex projects, a management reserve is used to cover those types of risks.

3. Is an aggregate impact calculation template spreadsheet available on the FHWA website?

Well the one, the P3-VALUE will help you calculate the aggregate impact using the risk assessment tool and that tool is available on the Center for Innovative Finance Support's website under the P3 toolkit. Now that is a learning tool. Now FHWA also uses another software tool called Crystal Ball but it's not on our website because it's proprietary. There's another software program called At Risk I believe, and those are the programs that actually run the Monte Carlo simulation so depending on what program you use will that's what your spreadsheet will have to be based upon so the spreadsheet for Crystal Ball is going to look a little different than the spreadsheet for At Risk. The other thing is it's very flexible how you model the spreadsheet so you can make it very complicated, very complex, or you can make it very simple. The good thing about the Monte Carlo simulation is that it is very scalable. So we don't have any sample spreadsheets out there for the Crystal Ball program we use just because it can vary a lot based on the application, the project that you are using it for.

4. Does the P3-VALUE schedule model treat each activity as a discrete duration or does it model the average project duration?

What we are trying to get at is the aggregate delay so that's what you can hang your hat out of P3-VALUE. Now P3-VALUE also for the design bid phase, actually aggregates each individual phase within design build such as planning, construction and transition, so there are several phases that are included there and if you provide P3 value with the subcategory of the risk, then it will actually do it and give you the results by these individual subcategory phases.

5. Should low probability, low consequence risk be ignored or just rolled up into a variance on the base estimate?

It depends. What we do a lot of times do with low probability, low consequence risk is add them together and then make it one aggregate risk. It all depends on how you want to model your estimate. Sometimes we sort of ignore low probability, low consequence risks, but most of the time we do try to aggregate them into one specific risk that we will just call low impact, low probability risks.

6. With regard to the VDOT formula, how did you arrive at a multiple of four for the most likely risk, and is that unique to transportation P3s?

I don't know how VDOT that is Virginia DOT came up with the four but I understand that this multiple of four is used in the construction industry by contractors who are trying to estimate the price to bid on a project. By multiplying the most likely risk value by four, I believe that it allows the risk distribution to mimic a standard normal distribution in a simple formula. So in simplified terms the shape of the distribution is such that the height of the triangle is roughly the same height as the bell-curved shape found in a normal distribution.

7. Can this tool be used to determine when it makes sense for the owner agency to buy insurance for example for damage to facilities by weather or vandalism?

For one thing, you're going to get estimates of aggregates out of this tool. What you are going to be doing is you are going to actually be evaluating each individual risk yourself with your experts. So your experts are the ones who are going to produce those probability distributions and range of impacts so you could obviously use that formula, the Virginia DOT formula based on the estimate of for individual risk because what P3-VALUE is doing is simply aggregating risk together. To do an individual risk, you would have to use that formula if you think that formula is a good one and have your experts determine the probability distribution of the impacts and the probability of the risk occurring and then you simply do the multiplication as we showed on that slide. And then you compare it with the insurance costs.

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