1. PROBABILISTIC RISK ANALYSIS Joep van der Meer ISPA/SCEA Joint International Conference Brussels 14-16 may 2012

2. PROBABILISTIC RISK ANALYSIS Civil Engineering The Dutch way Risk analysis Probabilistic results Residual risks Risks > 50% Dependencies ISSUES 3. Masterclass Risicomanagement s.v. ConcepTRisicomanagement s.v. ConcepT -5- 4. RISMAN (Riskmanagement) SSK Cost calculation 1. Set goal 2. Define risks 3. Most important risks 4. Measures/management Format & Definitions Probabilistic analysis Monte Carlo, 10000 x 5. Triturus Cristatus Great Crested Newt RISK ! 6. Mag nitude Risk = % x Pro bability o f o ccurance Po te ntial se ve rity o f im pact 5% x 100.000 5.000 = 7. Jury 8. nr risk Probability Severity Magnitude 1 Useofexistingconstructionsisnotpossible 40,0% 15.000.000 6.000.000 2 Noisebarriersmustbechangedtotransparant 40,0% 10.000.000 4.000.000 3 Congestionduringbuildingrisestounacceptablelevel 30,0% 10.000.000 3.000.000 4 Emegercy-serviceswantplanningtobeadjusted 30,0% 5.000.000 1.500.000 5 Municipalitygrantsnobuildingpermission 40,0% 3.000.000 1.200.000 6 Politicalpressuretoadjustplans(newideas,requests) 20,0% 5.000.000 1.000.000 7 Problemsinlandacquisition,expropriationnecessary 20,0% 5.000.000 1.000.000 8 Encounteringofunexpectedfloraandfauna 40,0% 1.500.000 600.000 9 Unexpectedsoilpollution 30,0% 1.500.000 450.000 10 Waterdrainageduringconstructioninsufficient 10,0% 5.000.000 500.000 RISK TOTAL 19.250.000 9. nr risk Probability Severity Magnitude 1 Useofexistingconstructionsisnotpossible 40,0% 15.000.000 6.000.000 10. RISK TOTAL (Deterministic) 19.250.000 RISK TOTAL (Probabilistic) 25.075.000 11. Contingencies IDENTIFIED RISKS ISSUE 1 12. Classical Swine Fever Virus 13. Contingencies UN-IDENTIFIED RISKS IDENTIFIED RISKS 50% 50% 14. Risks >50% ISSUE 2 BASIC COST BREAKDOWN 15. ISSUE 3 Dependencies 16. nr risk Probability Severity Magnitude 1 Useofexistingconstructionsisnotpossible 40,0% 15.000.000 6.000.000 2 Noisebarriersmustbechangedtotransparant 40,0% 10.000.000 4.000.000 3 Congestionduringbuildingrisestounacceptablelevel 30,0% 10.000.000 3.000.000 4 Emegercy-serviceswantplanningtobeadjusted 30,0% 5.000.000 1.500.000 5 Municipalitygrantsnobuildingpermission 40,0% 3.000.000 1.200.000 6 Politicalpressuretoadjustplans(newideas,requests) 20,0% 5.000.000 1.000.000 7 Problemsinlandacquisition,expropriationnecessary 20,0% 5.000.000 1.000.000 8 Encounteringofunexpectedfloraandfauna 40,0% 1.500.000 600.000 9 Unexpectedsoilpollution 30,0% 1.500.000 450.000 10 Waterdrainageduringconstructioninsufficient 10,0% 5.000.000 500.000 RISK TOTAL 19.250.000 17. nr risk Probability Severity Magnitude 1 Useofexistingconstructionsisnotpossible 40,0% 15.000.000 6.000.000 2 Noisebarriersmustbechangedtotransparant 40,0% 10.000.000 4.000.000 3 Congestionduringbuildingrisestounacceptablelevel 30,0% 10.000.000 3.000.000 4 Emegercy-serviceswantplanningtobeadjusted 30,0% 5.000.000 1.500.000 5 Municipalitygrantsnobuildingpermission 40,0% 3.000.000 1.200.000 6 Politicalpressuretoadjustplans(newideas,requests) 20,0% 5.000.000 1.000.000 7 Problemsinlandacquisition,expropriationnecessary 20,0% 5.000.000 1.000.000 8 Encounteringofunexpectedfloraandfauna 40,0% 1.500.000 600.000 9 Unexpectedsoilpollution 30,0% 1.500.000 450.000 10 Waterdrainageduringconstructioninsufficient 10,0% 5.000.000 500.000 RISK TOTAL 19.250.000 18. RISK TOTAL (Deterministic) 19.250.000 RISK TOTAL (Probabilistic, NO corr) 25.075.000 RISK TOTAL (Probabilistic, CORR) 25.365.000 19. ? 20. ABSTRACT: Probabilistic riskanalysis, more insight into contingencies The financial consequences of uncertainties and risks which occur during the design of a project are very hard to predict. This makes it difficult to calculate the amount of contingencies needed. This presentation discusses how probabilistic risk analysis (PRA) can assist in improving the financial design of projects. The PRA method shown here is based on my experience with cost and risk calculations in civil engineering projects for the Dutch government. Financial risks During the implementation of infrastructural projects we often face unexpected events which may result in substantial financial setbacks. . In the calculation of the required financial reservations subjective judgements and assumptions often play an important role. A more objective and reliable tool for identifying and managing these risks is to perform a probabilistic risk analysis. PRA A common way to start a financial risk analysis is a session with all the stakeholders. This should lead to an inventory of all the relevant risks. Each risk is assigned to a stakeholder and the magnitude is quantified by the formula Probability of Occurrence (%) x Severity of impact () . The required contingencies for the project are basically the summation of all the individual outcomes. Adding a probabilistic calculation, PRA, leads to an even better estimation of the financial risks. Here, the risks are calculated 10,000 times by a Monte Carlo simulation. In each iteration the risk will occur or not occur based on a discrete probability function.In addition, the financial effect of the risk is provided with a bandwidth with a highest and lowest value, which leads to a triangular distribution. A PRA produces the following results: 1) A probability distribution of possible outcomes of the required risk reserve. 2) A tornado chart in which risks are appointed by their contribution to the amount of uncertainty. These results may lead to adjustment of the amount of contingencies and also show which risks should get the highest attention in the risk management process. 21. Discussions The PRA method gives reliable results but there are some comments to be made. 1. Dependencies Risks are usually considered as independent events. This assumes that there is no correlation in the odds of occurrence of the various risks. Using examples I show that risks may not be independent , and that the occurrence of one particular risk may increase the probability that another risk will occur. 2. Risks are greaterthan 50% Risks with a probability of occurrence greater than 50% are in the Dutch practice not considered as risks but as certainties. Consequently, these risks (certainties) are included for 100% in the cost estimation. 3. Residual Risks Its impossible, even using a well developed risk analysis tool such as PRA, to cover all risks. Practice has shown us that unpredicted, unidentified risks will always occur. Therefore a surcharge is necessary. This can be calculated in several ways. 22. Biography Ing. Joep F. van der Meer (BSc) Joep van der Meer is a Senior consultant/construction economist at Arcadis for civil and infrastructural projects. He specializes in cost calculation, risk management, life cycle costing and contracting. In addition he is a teacher/trainer in courses for Project Management, Risk Management and Cost Management. He also contributed to the SSK, the Dutch Standard System for Estimating Costs in the Civil Engineering Sector. In this widely spread system the probabilistic approach of estimating costs is fully integrated. In many projects, concerning the building of news roads, railroads and other infrastructural constructions he was responsible for cost calculation, cost control and risk analysis. Currently he is working at the Dutch Flood Protection Program, a 3 billion project to protect Holland against the sea level rise. Email: joepvandermeer@kostenenkennis.nl