3.5  Capital works cost and risk-increasing cost certainty over time

It is a characteristic of major capital works, particularly infrastructure assets, that they are of long duration, complex and integrated into the physical environment of the project and the community. Therefore, there is inevitably a high degree of uncertainty in the capital cost early in the project that will reduce as the project is approved then delivered as illustrated below.

Figure 5: Increasing capital cost certainty over the Project Delivery Life Cycle

This illustration applies equally to the whole of the Business Case's suite of capital works as it does to the alliance's scope. The TOC represents the expected cost of the alliance's scope at completion. The TOC should neither be a conservative nor a non-conservative figure. At the time of approval of the Business Case, there will be a material difference between the expected cost and the modelled 'maximum.7 At the time that the TOC is approved, there may still be a material gap if the alliance's scope has a number of risks that cannot be dimensioned until construction is underway. However, that difference should be significantly less given that the level of cost certainty is improved due to the collaborative effort by the Proponents and the Owner through the TOC development process. High degrees of certainty of cost outcome are always desirable, however, artificially high degrees of certainty will almost certainly inflate prices, particularly when there is limited or no price competition.

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7 A common practice is to use Monte Carlo analysis to calculate the P90 cost estimate for a major capital project, this being the calculated cost that has a 90 per cent chance of not being exceeded. The P90 cost estimate is often taken to be practically the 'maximum' cost. If there is a difference between the expected cost of a TOC and the 'P90' cost of less than 5-10 per cent, then it is highly likely that the TOC is conservative and inconsistent with the definition of the TOC.