W8_PieroAnticona_Sensitity Analysis and Contingency Management

1)    Step 1- Problem or Opportunity Statement

During the preparation of Cost Estimates, GAO recommend 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 are 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 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.

4)    Step 4- Selection of the acceptable criteria.

The following attributes will be considered for the selection criteria:

We will determine which strategy can be better applied to variation in each factor and also present a comment or justification

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

Table below shows what is suggested as strategy in order to allocate cost for potential variations.

	Best strategy	Comment
1.   a shorter or longer economic life;	Buffer	This factor has not defined which phase of development might be shorter or longer.
2.   the volume, mix, or pattern of workload;	Buried	If we can assess what units are impacted by a volume variation we can allocate this range in each work package.
3.   potential requirements changes;	Buffer	During design phases, it is difficult to predict changes in product or project requirements or other variations based on regulatory norms.
4.   configuration changes in hardware, software, or facilities;	Buried	If software is not related to project management activities (software for capital cost control, quantity control, procurement packages, contract management, etc.), there must be a specific account for this package.
5.   alternative assumptions about program operations, fielding strategy, inflation rate, technology heritage savings, and development time;	Buried	These phases are detailed in the schedule, therefore there are accounts to allocate cost.
6.   higher or lower learning curves;	Buried	This correspond to historical data and it can be always allocated to project activities.
7.   changes in performance characteristics;	Buried	A prediction of bad or good performance it is always linked to specific activities. It cannot be applied to the whole project.
8.   testing requirements;	Buffer	During pre-commissioning or commissioning phases requirements can varied from original plan.
9.   acquisition strategy, whether multiyear procurement, dual sourcing, or the like;	Buffer	Procurement activities might differ for each procurement package in function of new technologies, availability of providers, location, etc.
10.         labor rates;	Buried	Depending if there are unions or not. Labor rates always can get an impact in the long term. It can be distributed to each package.
11.         growth in software size or amount of software reuse; and	Buffer	There is always a risk that data in project has to be managed by more resources. It is difficult to quantify the data to administrate in a project.
12.         down-scoping the program.	Buried	When down-scoping it is necessary to identify which deliverables will not longer be executed, therefore some risk also might disappear. It is recommended a new risk assessment, then an updated management plan must be implemented.

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 Buried (7 out of 12) because they impact to specific activities or resources that can be distributed in the cost structure of the project.

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.

----------

8)    REFERENCES.

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

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

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.