Dynamic Cost Risk Assessment for Controlling the Cost of Naval Vessels

Abstract

Naval vessels, like most large-capital projects, have a long history of cost growth. To get a handle on this problem, NAVSEA's Cost Engineering & Industrial Division, NAVSEA 05C, has introduced Probabilistic Cost Risk Analysis (PCRA) into the Department of Defense (DoD) Planning, Programmatic, Budgeting, and Execution System (PPBES). The quantification of cost in terms of cumulative probability distribution functions (CDF) or S-curves provides a macroscopic view of project risk. Risk curves alone do not provide adequate visibility into the individual project risk drivers; therefore, they are insufficient for planning and managing risk reduction activities (RRA). Complex projects typically involve a set of high-consequence, project-specific risks that require detailed analysis and for which risk response actions need to be developed and implemented. The analysis of specific risks and RRAs requires a microscopic view. We present a practical and mathematically sound approach using scenarios and Monte Carlo simulation within the framework of decision trees and risk curves. The approach is detailed using a realistic but simplified case of a project with three technical risks.