The following presentation was given at:

SCAF Workshop
“Integrated Cost and Schedule Risk Analysis”

Tuesday 15th November 2016

The BAWA Centre, Filton, Bristol
Released for distribution by the Author
www.scaf.org.uk/library
 “What are the chances of that?
Quantification with Monte Carlo simulation”
Doug Oldfield
Palisade Corporation
Agenda

Introduction of myself & Palisade

Introduction to Monte Carlo simulation

Adding uncertainty to a cost estimate

Incorporating a risk register into the estimate

Applying uncertainty to a schedule

Adding risk events to a schedule

Combining cost and schedule uncertainty analysis

Questions?
Doug Oldfield – who am I?

Look after sales & business development in the south of the UK & the
Middle East

Married with a four year old daughter & an eleven month old son

Joined Palisade 8 years ago in 2008 and have worked with clients in
industries such as oil and gas, defence, pharma,
mining, finance, insurance, construction, engineering,
retail, manufacturing, and many more.

Degree in Politics

Contact via doldfield@palisade.com

+44 7553 352 030
Palisade Corporation – a brief overview

Palisade was founded in 1984 and we provide risk and decision analysis
solutions for multiple industries, including @RISK

Through techniques like Monte Carlo simulation, decision trees &

optimisation we enable you to understand risks and make better decisions

More than 200,000 users worldwide.

Palisade tools are currently used by 93% of the Fortune

100, and 76% of the Fortune 500 companies worldwide

Taught annually to more than 40,000 MBA students

More than 1,500 training & consulting engagements

Some of our clients
The starting point
The issue
Bombs & Casinos: Embryonic Simulation
Monte Carlo simulation

Uses probability distributions to capture

and model uncertainty. @RISK does this
within Microsoft Excel and Project.

Generates thousands of scenarios to give

probabilistic outputs instead of static
(deterministic) ones.

Uses confidence levels (P-values) to

quantify the likelihood of events or
outcomes.
Why is this important? Distributions everywhere!
Why is quantitative risk analysis important?

Modeling - create a representation of a real-life situation to analyze it,

usually mathematically.

Traditional analyses combine single “point” estimate of a model’s

variables to predict a single estimate of results.

Combined errors in each estimate often lead to significantly different

“real-life” results.

Decision you made on your “expected” results might have been different
if you had a complete picture of all possible outcomes.
The starting point – Microsoft Excel
How a regular Excel model works

Project Metrics
Volume Costs
Start
Price/Mix Static Date
Point (deterministic)
Estimates Excel Model NPV
Cost
IRR
Revenue OOIP
Monte Carlo & @RISK – how does it work?

Build a model in Excel, or use an existing one.

Determine which components are uncertain in your model

then convert them into ranges using probability distributions.

@RISK then generates thousands of scenarios for each of

the uncertain inputs

The resulting output scenario (cost, NPV,

risks, etc.) are computed over and over again.
Monte Carlo models

Outcomes in
ranges:
Costs, Start
Monte Carlo
Value Date, NPV, IRR,
Simulation
Ranges
Volume

Price/Mix Same
Project Key risk
Excel
Metrics drivers
Cost Model

Revenue

Risk and
opportunities
Benefits of Monte Carlo simulation #1

Makes models less wrong & more useful!

You get to see everything that might happen: best case, worst
case, most likely case, and everything in between

You get to see the different probabilities of these outcomes

occurring

Fewer surprises and better prepared for contingencies

Understand what could happen, and then knowing how likely

it is, be able to plan accordingly

Model, test & implement effective mitigation strategies

Benefits of Monte Carlo simulation #2

Capture correlations between related variables

Identify drivers of risk

Sensitivity analysis ranks variables according to impact on your

output and enables you to understand which factors are most
important

Target specific variables which have the biggest impact

Don’t waste resources on low-impact events, or allocate too

much to low-probability events
Monte Carlo simulation

Let’s take a look….