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Systemic Risks and Parametric Modeling
Abstract
Predictability in cost and schedule outcomes is a key financial objective for capital project systems. The primary measure of predictability is accuracy; it measures how estimates differ from the final actual outcomes. Unfortunately, accuracy in funding estimates in the construction arena has been elusive. Despite over 50 years of research, most companies are unable to quantify risks realistically. The cause is simple; traditional risk quantification methods have no empirical basis. This chapter is about empirically-based parametric modeling of “systemic” risks. Systemic risks are attributes of a project system and they are the dominant driver of project uncertainty. There are a number of reliable methods to quantify project-specific risk “events” and conditions and escalation and exchange risks. While those are the topics of other chapters, this chapter describes how to integrate the parametric method with those. Working together, those risk quantification methods can realistically predict the “usual” project cost growth and schedule slip.
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