Introduction of the day Sherry Sharpe

The Evolution of Modern Comptrollership and the Role of Cost Estimating Mike Lionais Acting Assistant Comptroller General, Financial Management, Treasury Board of Canada Secretariat

The Maturation and Integration of Cost Estimating in the Government of Canada Erin K. Barkel Senior Policy Analyst, Costing Centre of Expertise, Treasury Board of Canada Secretariat

Health Break / Networking

Decision-Making and the Need for Cost Estimating Information Troy Crosby, Director General, Defence Major Projects Sector, Public Services and Procurement Canada Nandini Srikanthia, Director General, Real Property and Service Integration Directorate, Canada Revenue Agency Binyam (Ben) Solomon, Senior Scientist, Defence Research and Development Canada Dan Ross (Moderator), Executive in Residence and Visiting Professor, Telfer School of Management, University of Ottawa

Lunch / Networking

Introduction to Uncertainty and Risk Analysis Allan Weldon Executive Director, Centre for Costing in Defence – Department of National Defence, Government of Canada

FMI PD Day Allan Weldon EDCCD 25 January 2018 ASSISTANT DEPUTY MINISTER (FINANCE) Centre for Costing in Defence COST RISK FRAMEWORK FMI PD Day Allan Weldon EDCCD 25 January 2018

Outline Background CFO Roles and Responsibilities Cost Risk Framework Example

Background Modernization of financial management governance in the federal government CFO roles and responsibilities CFO attestation process Alignment of DND Costing Process to international leading standards Considered how allies perform costings Joined International Cost Estimation and Analysis Association Cost Risk Analysis – area of improvement Industry and academic standards were adopted within the constraints of existing public service policies, DND/CFO operating environment, and stakeholder requirements Work performed by mix of Centre of Operational Research and Analysis (CORA) and CFO staff

CFO Roles and Responsibilities on Financial Risk 4.2.2 Leading and managing the departmental financial management function, including the following: 4.2.2.1 Providing strategic financial and business advice to support deputy heads and senior departmental managers to ensure that: 4.2.2.1.1 Program plans and key business decisions are based on sound financial analysis; and … 4.2.4 Performing a challenge function on financial management matters, including assessing departmental financial plans, and forecasts to determine whether: 4.2.4.2 Key financial assumptions underlying the plans are reasonable and their multi-year impacts have been assessed; 4.2.4.3 Financial risks and mitigating strategies are identified; 4.2.6 Advising the deputy head and the Comptroller General of Canada on a timely basis if: 4.2.6.1There is a critical financial risk to the department, including where there is a possibility that the department may exceed its appropriations

CFO Assertions The nature and extent of the proposal is reasonably described and material assumptions (see definition) having a bearing on the associated financial requirements have been disclosed and are supported. Significant risks having a bearing on the financial requirements, the sensitivity of the financial requirements to changes in key assumptions, and the related risk-mitigation strategies have been disclosed. Financial resource requirements have been disclosed and are consistent with the assumptions stated in the proposal, and options to contain costs have been considered. Funding has been identified and is sufficient to address the financial requirements for the expected duration of the proposal. The proposal is compliant with relevant financial management legislation and policies, and the proper financial management authorities are in place or are being sought through the proposal. Key financial controls are in place to support the implementation and ongoing operation of the proposal.

CFO Assertion #2 Criterion 2.1 - Key risks have been considered. 2.1.1 Given the current environment and information available, key risks having financial impact are identified, clearly described and disclosed as appropriate. 2.1.2 Risks have been considered in the context of the departmental Corporate Risk Profile. Criterion 2.2 - Likelihood and impact of key risks has been considered. 2.2.1 The likelihood and impact of the key risks on the financial requirements, should the risks materialize or the assumptions change, has been considered, assessed and articulated. 2.2.2 The sensitivity of the financial requirements to change, should a key risk materialize, has been considered. Criterion 2.3 - Risk response and mitigation strategies are clear. 2.3.1 The mitigation strategies for key risks with financial impacts are clear and reasonable. 2.3.2 The risk response and mitigation strategies for key risks with financial impacts are scaled to the likelihood and impact of the risks.

Understanding Uncertainty and Risk is the state, even partial, of deficiency of information related to understanding or knowledge of an event, its consequence, or likelihood. (variability of an event) Risk refers to the effect of uncertainty on objectives. It is the expression of the likelihood and impact of an event with the potential to affect the achievement of an organization's objectives. (exposure to loss/gain)

Understanding Uncertainty and Risk Risk and uncertainty analysis would inform the boundaries and confidence level of the cost estimate Sensitivity analysis quantifies the variance (i.e. best and worst case scenarios) induced into the estimate by identified risk drivers The probability of occurrence is then considered to establish the confidence level of the estimate Upper cost estimate boundary Lower cost estimate boundary Decision makers are fully informed of the financial risk of the decision they are being asked to consider – specifically what could go wrong, by how much, and how likely is it to occur. * Peter R Garvey, Brian Flynn, Peter Braxton & Richard Lee (2012), “Enhanced Scenario Based Method for Cost Risk Analysis: Theory, Application and Implementation”, Journal of Cost Analysis and Parametrics, 5:2, pg 114

Cost Risk Framework Outline Identification Cost Risk Quantification Cost Risk Reporting

Cost Risk Identification Steps DND/CF Integrated Risk Management Guidelines Application based on DND’s Cost Risk Framework Identify the primary mission/objective that may be at risk and the time frame (Horizon 1, 2, or 3) being considered Mission/Objective: point estimate/financial information under consideration What could make the values being considered deviate from the calculated point estimates

Cost Risk Identification Steps (cont’d) Decide on necessary people, expertise, tools and techniques (e.g., scenarios, brainstorming, checklists, criteria to be used) to complete the risk assessment Dictated by the characteristics of the project/initiative Typical stakeholders project/program manager, project/program director economists, governance process representatives, subject matter experts in the applicable field

Cost Risk Identification Steps (cont’d) 3. Consider possible causes and scenarios to explain why/how risks might occur Understand the initiative Program description/Project Charter Project Complexity and Risk Assessment Schedules, organigrams, etc. Collect Data Delphi method, Brainstorming, etc. Compile Cost Risk Register Standardized approach

Cost Risk Identification Steps (cont’d) 4. Perform a stakeholder analysis Determine risk tolerances Stakeholder position, attitudes 5. Identify the risk owner and the degree of control that exists over the risk Contingency Other mitigation strategies

Cost Risk Quantification - Qualitative Qualitative Methods Qualitative cost risk analysis Standard for assigning contingency Watch the pitfalls – substantive and indicative

Cost Risk Quantification - Quantitative Quantitative Methods Cost Driver Method Typical “three point estimate” Focused on the change in cost rather than the risk impact Risk Driver Method Focused on the risk The risk impact on cost has to be quantified

Cost Risk Quantification - Quantitative Quantitative Method Steps Selection of methods Determine the range and probabilities of the aggregate risk Sensitivity Analysis Triangular Distributions Assess the project contingency Carry out a sensitivity analysis

Cost Reporting A sensitivity analysis of the cost risk breakdown structure's elements The project's base estimate cost and its probability level A cumulative distribution (S curve) of the project's cost in budget year dollars, including the probability of the base estimate and selected contingency level Risk adjusted, in budget year dollars, costs by year to show phasing of risks

In Practice – Cost Risk Identification Review and understand information produced as part of the project approval process - Project Complexity and Risk Assessment - Project Charter - Discussions with stakeholders (project staff, SMEs, industry) Cost Risk Board Interviews Develop Cost Risk Register and confirm inputs with stakeholders

In Practice – Cost Risk Quantification Sensitivity Analysis

S – Curve: Point Estimate

S – Curve: Contingency

Next Steps Incorporation of information into governance processes Risk tolerance Structure of authority paragraphs Further improvement

Questions?

Costing Process Flow

Small Team Exercise: Developing the Risk Register Vrenti Ghergari Manager, Centre for Costing in Defence - Department of National Defence / Government of Canada

Health Break / Networking

Transitioning from uncertainty and Risk Analysis to Contingency Vrenti Ghergari Manager, Centre for Costing in Defence - Department of National Defence / Government of Canada

In Closing Thank you for coming!