AAOM Handbook

ES.07 Calculate Cost Distributions & Confidence Level

Context

The overall cost estimate derived for an ExPenditure Schedule (EPS) is a function of the variability in the likely frequency of occurrence for each activity (as defined in the Operating Master Schedule - OMS), and the variability in the likely cost of an activity at each occurrence (as defined in the EPS). The only practical way to represent these multitude of possible outcomes is by a probability histogram. We have defined the probability distribution for the frequency of each Activity in the OMS and we have defined the probability distribution for the cost of each occurrence of each low sample rate Activity in the EPS. By running a Monte Carlo simulation of the schedule, using the Activity frequency and cost distributions we can predict the cost forecast probability distribution.

The confidence level for the process cost target can be calculated from the cost probability distribution.

Purpose

To calculate the confidence level for the EPS meeting the process cost targets.

Quantity

• One distribution for the cost forecast outcome for the EPS • One confidence level for achieving the cost target for the process.

Quality

The probability distribution for the EPS is determined by running a Monte Carlo simulation of the Activities, using the distribution for the Activity frequency and costs defined in the OMS and EPS. The confidence level for achieving the cost target set for the process is the cumulative probability of the simulation output distribution that is below the target value. For example, if the cumulative probability of the Asset cost target in the distribution is 40%, then the confidence level is 40%. A contingency figure shall be estimated by calculating the amount that must be added to the most likely budget value in order to achieve the required confidence level for the budget. For example if the ‘most likely’ outcome is at the 50% cumulative probability and the required confidence level is 80%, the contingency is the figure that must be added to the ‘most likely’ value to achieve a cumulative probability of 80%.

Time

At each forecast update interval (typically quarterly).

© McAlear Management Consultants 2006

Operational Planning: Set Expenditure Schedule

Updated: August 2018

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