W8.1 Sensitivity Analysis and Contingency

1)    Step 1- Problem or Opportunity Statement

During the preparation of Cost Estimates, GAO recommends as a best practice a Sensitivity Analysis in order to identify Cost Drivers in the Cost Estimate and how it is affected when a change in a cost driver’s value happens. This Sensitivity Analysis must be complemented with Risk and Uncertainty Analysis, therefore, mitigation steps will be part of the assumptions in a Basis of Estimate Document. This analysis will help to determine ranges of potential cost as a previous step of Risk and Uncertainty assessment.

As explained in the first post of the blog, contingency can be allocated following two strategies. Once is an amount buried in a cost account and another one is a buffer in a cost account.

What is the best strategy that responds to a variation in factors used in sensitivity analysis?

2)    Step 2 – Feasible Alternatives

There two strategies to allocate contingency. The following options will be taken into consideration:

1.    Include Contingency

a.    Include it and show it and put it in a contingency project account

b.    Include it but Bury it in project accounts

3)    Step 3- Develop the outcomes for each alternative

We will determine a qualitative analysis to determine which of the following factors have most impact in a project. Then we will choose which strategy responds better to an impact of the following factors suggested by GAO in a sensitivity analysis:

1.    a shorter or longer economic life;

2.    the volume, mix, or pattern of workload;

3.    potential requirements changes;

4.    configuration changes in hardware, software, or facilities;

5.    alternative assumptions about program operations, fielding strategy, inflation rate, technology heritage savings, and development time;

6.    higher or lower learning curves;

7.    changes in performance characteristics;

8.    testing requirements;

9.    acquisition strategy, whether multiyear procurement, dual sourcing, or the like;

10. labor rates;

11. growth in software size or amount of software reuse; and

12. down-scoping the program.

Using the following Risk Scoring Matrix, we will determine which factors have most probability of occurrence and rank of consequence. See table below:

Risk Scoring Matrix

            After assigning to each factor a probability and a consequence we get the following rank:

            The list in order of weight is as follows:

           

Rank of Sensitity Factors

             

4)    Step 4- Selection of the acceptable criteria.

The following attributes will be considered for the selection criteria:

We will determine which type of contingency can be better applied to variation in each factor and also present a comment or justification in order to respond to tactical response.

5)    Step 5- Compare the outcomes from each alternative analysis done in Step 3 against the minimum acceptable criteria from Step 4.

Once we have identified the most influenced factors that might impact the cost estimate, we can determine what strategy and tactical response we might implement. See the following table:

           

Strategical and Tactical Response

Table below shows what is suggested as strategy in order to allocate contingency. 

Assignation of Contingency

6)    Step 6- Selection of the “best”.

As a result of the suggestion as shown in the Table above, most cost drivers’ variation could be Buffer (7 out of 12) because most of the tactical response cannot be applied to specific activities at this level of the point estimate.

A combination of both can be elaborated. But this depends on risk management processes established to assess contingency regularly.

7)    Step 7- How to plan on tracking/reporting on recommended choice. 

As Sensitivity Analysis is a previous step to Risk and Uncertainty analysis. This can be a preliminary assessment of what strategy should the company or the project team conduct in order to determine if contingency can be Buried in project Accounts or a buffer must be created.

Also, these factors must be:

-       Well-documented sources supported the assumption or factor ranges.

-       Cost-sensitive assumptions and factors were further examined to see whether design changes should be implemented to mitigate risk.

-       Results were well documented and presented to management for decisions.

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8)    REFERENCES.

a. Sullivan, W. G., Wicks, E. M., & Koelling, C. P. (2012). Decision making Considering Multiattributes. In Engineering Economy (15th ed.). Harlow, England: Pearson Education Limited.

b. GAO Cost Estimating and Assessment Guide- Best Practices for Developing and Managing Capital Program Costs. Page 147-151.

c. Guild of Project Controls. (2016, January 05). 04.4 Asses_prioritize_and_quantify_risks_opportunities_-rev_1.00. Retrieved September 15, 2018, from http://www.planningplanet.com/guild/gpccar/asses_prioritize_and_quantify_risks_opportunities

d. Guild of Project Controls. (2016, January 05). 04.5 risk_opportunity_responses_strategies_and_tactics_-_rev1.00. Retrieved September 15, 2018, from http://www.planningplanet.com/guild/gpccar/risk_opportunity_responses_strategies_and_tactics

e. Guild of Project Controls. (2016, January 05). 08.0 Managing Cost Estimating & Budgeting. Retrieved September 15, 2018, from http://www.planningplanet.com/guild/gpccar/conducting-a-cost-risk-analysis

f. H. Lance Stephenson. (2015). Total cost management framework: An Integrated Approach to Portfolio, Program, and Project Management (2nd ed.). Morgantown, WV: AACE International. Page 269.