The Cost Estimation and Validation Process (CEVP) is a process used to address the common concerns associated with large complex projects. These include:
- Why do project costs seem to always go up?
- Why can’t the public and/or private owners be told exactly what a project will cost?
- Why can’t projects be delivered at the cost quoted at the start of the project?
CEVP opens the 'black box' of estimating, ensures cost transparency, and provides a basis for senior management decisions.
In CEVP, estimates are comprised of two components: the base cost component and the risk component.
Base cost is defined as the planned cost of the project if everything materialises as planned and assumed. The base cost does not include contingency but does include the normal variability of prices, quantities and like units. Once the base cost is established, a list of risks is identified and characterised (including both opportunities and threats, and listed) in a risk register. This process is shown in the diagram below, which is conducted according to the following principles:
- bring project and CEVP team (including subject matter experts) together in workshops
- promote openness to risks which may occur (culture of realism without cognitive bias)
- create mutual understanding of the project
- integrate uncertainties in all phases
- create a clear project structure which includes base cost, risk and escalation.
This risk assessment replaces general and vaguely defined contingency with explicitly defined risk events that include the associated probability of occurrence plus impact on project cost and/or schedule for each risk event. Risk is usually developed in a CEVP Cost Risk Workshop. The validated base cost, base variability and the probable consequence of risk events are combined in a simulation model (such as RIAAT) to produce an estimated range of cost and schedule, with probabilities of achieving a particular cost or schedule outcome. The output is a rich data set of probable cost and schedule, potential impact of risk events, ranking of risks, and risk impact diagrams.
An example of the probabilistic cost outputs can be seen in the diagram below. Note that similar S-Curves can be derived for schedule. The three S-Curves shown below are made up of the following cost components:
- Base cost: the cost if “all goes according to plan” without contingencies
- Uncertainty cost: the variability of prices, quantities and time frames
- Risk cost: the cost resulting from threats and opportunities that might occur
- Escalation cost: additional costs resulting from inflation
Diagram courtesy of Taylor Burns, RiskConsult, GmbH
As shown in the diagram above, once uncertainty, risk cost and escalation are considered through the CEVP process, the probability of the originally budget not being exceeded is only 20 per cent.
The information on this page was primarily sourced from:
- Text provided by Taylor Burns, Project Engineer, RiskConsult, GmbH
- Peer review conducted by Pedram DaneshMand, Director, Project Risk Consulting, Audit, Assurance & Risk Consulting, KPMG
CEVP-RIAAT Process—Application of an Integrated Cost and Schedule Analysis by Philip Sander and Martin Entacher from RiskConsult and John Reilly from John Reilly International.
Edited by Nadine Cranenburgh