Improving Decisions with Cost Risk Assessment

The use of cost risk assessment for decisionmaking in evaluating public works projects is demonstrated with a Monte Carlo simulation model. The analysis shows that the risk of cost overruns can be quantitatively described and characterized. The results of the risk assessment can be used to identify the extent of exposure and the likelihood of an overrun, and to choose a desired level of protection from cost overruns, heretofore not an option with traditional cost contingencies. The information provided by cost risk assessment can be put to different uses. This is shown by a benefit-cost analysis that utilizes the distribution of total costs rather than the official point estimate of costs to demonstrate economic efficiency, which a point estimate would have failed to do.