3.12

## Darden School of Business, University of Virginia

Skip to 0 minutes and 1 secondIn a similar way to the fact that we thought about the schedule variability and the uncertainty that exists in our project completion time, there is also a certain, uncertainty related to the cost of our projects. Risks and variability that we can actually think about, and plan for, associated with how much each task will cost us, and what is the overall cost of our project. Our cost suffer from the same type of variation. It could be external effects, such as weather or regulation that might imply that we will have to pay more to execute and to complete some of our tasks. We might need extra resources. And therefore, we can think about the variability that exists.

Skip to 0 minutes and 40 secondsAnd we can start conceptualizing what kind of contingencies we would like in place. How are we going to ensure that we do not exceed our budget? And how do we plan accordingly to cope with any uncertainty that we find ourselves facing. Before we see a vision of what it might look like to run a similar analysis, a simulation analysis, to think about the, the uncertainty that exists in our project budget. Just a word of caution or some thought has to be paid to where we put the contingencies. Do not put the contingencies on each and every task even though the tasks themselves could be variable in terms of the duration.

Skip to 1 minute and 18 secondsAllow the project manager to control that contingency associated with the budget to give the project manager maximum control on where to spend the extra funds and when. And the project manager has that knowledge. And the project manager can balance the objectives and the priorities associated with the project objectives in order to best utilize the contingency budget. And so taking similar steps to the ones we took with the schedule, we can come up with a probabilistic forecast for how much the project would cost us. What is the budget that we need, and how comfortable or confident are we that we will actually meet that budget. We can look at an entire distribution. What is the likelihood our project costing so much?

Skip to 2 minutes and 3 secondsWe can talk about ranges. In the figure that we see here on the screen, we're talking about a budget for a project that can vary between 346,000 to somewhere just under $354,000. This is our 90% confidence range. We are 90% confident that our project budget will be somewhere within that range. And therefore, we can choose our overall project budget, and allow for extra contingency. Perhaps, we set it somewhere in the region of$350,000. And we give ourselves 10 to 15% contingencies to make sure that we are highly confident that we are going to meet this project budget, and not exceed it.

Skip to 2 minutes and 48 secondsPerhaps, we will come in under budget, but we know that we have the available resources if we need them.

# Cost Risk Analysis

There is uncertainty related to the cost of projects. As you watch this video, think about a recent or current project that you have worked on.

What are some of the risks associated with the cost of the project?
Did you plan appropriately for these risks?
What might you do differently in planning for cost risk for your next project?