AAOM Handbook

ES.06 Estimate Best & Worst Case Costs, Opportunities & Threats

Context

The ExPenditure Schedule (EPS) is a costed version of the OMS. That is, the forecast cost for the Resource Types (labour, equipment, materials/spares and utilities, etc.) that will be required to implement the OMS is combined with a quantity and price estimate, and the frequency/timing of the Activities, to forecast the expenditure profile over time. The figures used for the estimate should represent the Most Likely quantities and price. However, this estimate represents only one of many possible outcomes for the actual cost of the Activities. In practice there is a range of potential cost outcomes for each Activity, determined by the inherent variability in quantity use and pricing, with each potential cost outcome having a different probability of occurring (i.e. the cost of an activity is best represented by a probability histogram, with the Most Likely cost at the mode, or peak of the distribution). For the Activities that have a high sample rate within a measurement period the distribution of the average value of the sample will converge around the average when compared to the distribution of the individual sample results. This is characteristics defined by the Central Limit theorem in statistics. The standard deviation of the population averages compared to the standard deviation of the population reduces in inverse proportion to the square root of the sample size. In order to determine the confidence level at which a targeted cost can be delivered by the OMS/EPS the probability distribution for the Schedule cost outcomes must be estimated. To produce this estimate the shape of the probability distributions for the Activities must be defined. This can be done using a PERT value function with four parameters; the best case value, most likely case value, worst case value and the weighting factor to be applied to the most likely case value. When the sample size is significant the convergence towards the average will reduce the impact of the Activity on confidence levels to the point where the best and worst case outcomes can be ignored. The most likely case cost has already been defined in the initial quantity and pricing estimates. The best case, worst case and weighting parameters must be estimated to finalise the distribution characteristics. These estimates do not need to be precise, and the historical records for the activities, the experience of appropriate personnel and a knowledge of intended changes to the either the process or Production and Service Strategies can allow these estimates to be made with adequate accuracy. In making the estimates it is necessary to consider what can go well that will help the best case to be achieved and what can go badly to make the worst case occur. If these opportunities and threats are recorded then it is possible to implement some control actions that might increase the probability of a better outcome.

© McAlear Management Consultants 2006

Operational Planning: Set Expenditure Schedule

Updated: August 2018

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