The first consideration in model design is how the risks should affect the structure of the model. For example, although a cash flow model might normally be modelled in yearly units, the risks may well be quite different in summer to those in winter. In this case, it makes much more sense to separate the years out into halves or quarters for the purposes of the risk analysis. This is a matter of judgement, but in large risk projects simple prototypes may need to be constructed with different levels of detail to see what the impact the model structure has on the outputs. Another factor to consider in structuring the model is the timing of the risks and when they are to occur for each project delivery option, and how to combine and link the risks where correlations have been identified.
ADVANCED RISK QUANTIFICATION TECHNIQUE - EXAMPLE An example of how a risk is quantified using an advanced evaluation technique is as follows: a) Phase 1 & 2 - The risk identified during the initial risk workshop is 'Risk of adverse geological ground conditions'. The workshop participants assess this risk as having a 'Low' probability of occurrence and a 'High' capital cost impact if the risk were to eventuate. The risk was assessed as a 'transferable' risk. b) Phase 3 81 4 - The Risk Expert undertook a further review of the risk, placing a probability within the 'Low' range at 15% likelihood of occurring, and making a three point estimate representing the 'Best Case' 'Most Likely Case' and 'Worst Case' at $250,000, $325,000 and $600,000. The true distribution of this risk is not known and therefore a simple triangular distribution has been selected for modelling purposes. The Risk Expert estimates that the risk would occur once (or it may not at all) during the construction phase, i.e., if the risk were to occur at the beginning of the construction phase, it does not occur again. c) Phase 5 - These details are entered into the risk model. When the risk simulation is run, this risk will only occur once (if at all) during the construction period. During simulation, a value of zero will be selected 85% of the time, with the remaining 15% of the simulation runs will to be a value from the distribution, as described by the Risk Expert. |