1. Uncertainty Analysis in Capital Investment Planning and Execution
Carlos M. Alvarado, PE
CH2M, Transportation Business Group Senior Financial Analyst, St. Louis, Missouri

2. Uncertainty affects key parts of the strategic planning process
A Typical Strategic Planning Process
Focus of this presentation
Project Execution
Investment Decisions
Infrastructure Supporting Service Lines
Project Plan
Activities/Worksteps
Month A M J J A S O N D J F M
Program Management
Service Lines
I.1 Confirm stakeholders objectives
II.1 Review, refine, and detail
Prioritized Needs
II.2 Develop Council key business
III.1 Develop methodology to
Tolling
III.2 Map Masterplan aligning
III.3 Develop telec
III.4 Develop
Vision
Facilities
III.5 Fine tune
Tunnels
Other Systems
Risk Management Plan
Develop Vision Based on Strategy
Bridges
Stations
Program Charter # xx (Quarter )
Primary Objectives
Deliverables
Rail
Vehicles
Primary Objectives
Program Charter # xx (Quarter )
Deliverables
Guideway
External Skills
Bus
(3-4 Max)
Metrics
Project
Key
External Skills
Other
(3-4 Max)
Metrics
Project
Key
Project Sponsor
ICT Council
Resources
Council
Project Manager
ICT Council
Project Sponsor
Council
Project Manager
Council
Other
Operating Model

3. The purpose of the presentation is to describe the role of uncertainty when making investment decisions and during project execution
Describe how to incorporate uncertainty principles into capital investment planning and execution 1
Discuss how to identify key variables how to apply uncertainty to these variables 2
Discuss how to mitigate project risk based on probabilistic cost overruns forecasts 3

4. Why is uncertainty analysis important?
New Start requires an Alternatives Analysis and recommends the use uncertainty analysis for key “quantified measures” such as ridership or travel time savings1
It’s usually required by third-party auditors
It’s just good practice
May no longer be required to the same extent under FAST.

5. Let’s start with the capital investment decision
Describe how to incorporate uncertainty principles into capital investment planning and execution 1
Discuss how to identify key variables how to apply uncertainty to these variables 2
Discuss how to mitigate transportation project risk based on probabilistic cost overruns forecasts 3

6. Should an investment be made?1
EXAMPLE
Toll Booths
Open Road Tolling
…for a toll bridge what might be the financial impact of going from toll booths to open road tolling?

7. Analysis of Alternatives Criteria and Scoring
Financial Impact is a key criterion when comparing capital investment alternatives 1
ILLUSTRATIVE
Analysis of Alternatives Criteria and Scoring
Financial
Operational
Implementation
Customer Needs
Riskiness
Baseline
Alternative #1 
Alternative #2
Rating Definitions:
Alternative is far superior than Baseline
Alternative is better than Baseline
Alternative is comparable to Baseline
Alternative is inferior to the Baseline
Alternative is much more inferior than Baseline

8. The Financial impact is based on comparing the proposed Alternative(s) against the Baseline1
Revenue
Revenue
Net financial impact
Cost
Cost
Subtract
Equals
Proposed Alternative
Baseline
< 0 <
Negative financial impact
Positive financial impact

9. In the case of the open road tolling example, there will be uncertainty around some parameters1
EXAMPLE
Toll Booths
Open Road Tolling
Based on previous experience, possibilities include cost overruns, smaller-than-expected savings, others…

10. Uncertainty is modeled into the financial forecast and may have an impact on the results1
Net Present Value Savings Impact for Cashless Tolling Project
Waterfall Chart Results
ILLUSTRATIVE
Net impact might be negative (uncertainty)
+$X4
+$X3
Uncertainty
+$X2
+$X1
($Y)
($Z) $0
Operational Expenses Savings
Impact
Revenue Loss Impact
Capital Investment
TOTAL

11. To model uncertainty a probabilistic approach is required1
Impact of Uncertainty Analysis (Monte Carlo simulation) on Financial Calculations
ILLUSTRATIVE
Model
Without Considering Uncertainty
Considering Uncertainty
Key Parameter 1
Point estimate
Triangular distribution
Key Parameter 2
Point estimate
Normal distribution
Output
Point estimate solution
Cumulative probability distribution
Output Conclusion
Model output misleadingly suggests certainty (e.g., revenue is $xx)
Output is qualified by likelihood of occurrence (e.g., 75% confident that revenue will be more than $xx)

12. Next, let’s discuss how to identify the key uncertainty variables and how to model them
Describe how to incorporate uncertainty principles into capital investment planning and execution 1
Discuss how to identify key variables how to apply uncertainty to these variables 2
Discuss how to mitigate transportation project risk based on probabilistic cost overruns forecasts 3

13. To model uncertainty we rely on a Monte Carlo simulation tool
Start with an Ordinary Financial Model….
…and then Apply Crystal Ball Add-In1 2
@Risk® is an alternative

14. These tools run a useful diagnostic to reveal the most critical variables through a “tornado” chart
Impact of Key Model Parameters on Overall Project Costs 2
ILLUSTRATIVE
Tornado charts illustrate how each key parameter impacts results while other key variables assumptions are kept at their base (expected) value

15. In the case of the open toll example, the key financial parameter was revealed to be “leakage”2
EXAMPLE
Toll Booths
Open Road Tolling
Leakage is the volume of vehicles that pass through the open road tolled bridge but are not charged a toll

16. Likelihood Distributions That Can Be Assigned to Key Variables
To model uncertainty, apply a suitable distribution function to the key financial parameters… 2
Likelihood Distributions That Can Be Assigned to Key Variables

17. Cumulative Distribution Results
…which will reveal the likelihood that the net financial impact of implementing an alternative is within management’s threshold 2
Cumulative Distribution Results
ILLUSTRATIVE
What is the likelihood that the financial impact of implementing alternative will be negative?

18. Finally, let’s discuss how to incorporate uncertainty principles while executing a project
Describe how to incorporate uncertainty principles into capital investment planning and execution 1
Discuss how to identify key variables how to apply uncertainty to these variables 2
Discuss how to mitigate transportation project risk based on probabilistic cost overruns forecasts 3

19. Project execution is the last part of the strategic planning process3
Strategic Planning Process
Focus of this section
Project Execution
Investment Decisions
Infrastructure Supporting Service Lines
Project Plan
Activities/Worksteps
Month A M J J A S O N D J F M
Program Management
Service Lines
I.1 Confirm stakeholders objectives
II.1 Review, refine, and detail
Prioritized Needs
II.2 Develop Council key business
III.1 Develop methodology to
Tolling
III.2 Map Masterplan aligning
III.3 Develop telec
III.4 Develop
Vision
Facilities
III.5 Fine tune
Tunnels
Other Systems
Risk Management Plan
Develop Vision Based on Strategy
Bridges
Stations
Program Charter # xx (Quarter )
Primary Objectives
Program Charter # xx (Quarter )
Deliverables
Rail
Vehicles
Primary Objectives
Deliverables
Guideway
External Skills
Bus
(3-4 Max)
Metrics
Project
Key
External Skills
Other
(3-4 Max)
Metrics
Project
Key
Project Sponsor
ICT Council
Resources
Council
Project Manager
ICT Council
Project Sponsor
Council
Project Manager
Council
Other
Operating Model

20. During execution, want to avoid cost overruns which are usually tied to risks inherent in project execution 3
PMI’s PMBOK® recommends a formal risk management process
Risk Management Process Overview
Risk Management Planning
Risk Response Planning
Risk Monitoring & Control
Risk Identification
Risk Analysis

21. A key output of the risk management process is a Risk Register3
Typical Components of Risk Register
Category
Responsible Party
Risk
Current Status
Risk Statement
Risk Criticality
Source of Risk
Risk Likelihood
Consequence of Risk
Risk Handling Strategy
Date Identified
Other
Date Retired

22. Risk Register Cost Impact Expected Additional Cost Due to Risks
For our purposes, we are most interested on the cost impact of the risks on the register 3
Risk Register Cost Impact
ILLUSTRATIVE
Risk Title
Risk Statement
Current Status
Probability %
Cost Impact ($)
Low
High
Most Likely
Cost1
Probable Impact2
Risk 1
Utility relocation...
Active 30 50
1.5M
10.0M
12.0M
4.0M
Risk 2
Claims for delays…
1.0M
3.0M … …… …. ..
Risk N
Statement N XX
X.XM
Expected Additional Cost Due to Risks
XX.XM
Field where uncertainty analysis distribution is applied. In this case, apply triangular distributions.
Field where probability distribution “forecast” are calculated.

23. A typical uncertainty analysis output shows the probability of costs not exceeding a certain amount3
Cumulative Frequency Chart
ILLUSTRATIVE
70% probability is a common threshold
Probability of “not exceeding”

24. The cumulative frequency output can be used to assess potential project cost overruns3
ILLUSTRATIVE
In this example, 43% of scenarios the likely cost is higher than the
total resources allocated….
…resulting in a shortfall of contingency funds in some instances
43% of scenarios
shortfall
57% of scenarios

25. In summary, I believe uncertainty analysis might be useful for transportation planners
Acknowledges that the success of a project may depend on parameters that cannot be predicted with certainty (e.g., ridership, revenues, travel time savings, etc.)
Reveals and focuses management effort on the most critical variables / parameters (e.g., leakage from open road tolling example)
Helps keep close tabs on risk that may result in cost overruns (and/or delays) during project execution

26. Contact information
Carlos M. Alvarado, PE Senior Financial Analyst CH2M Transportation Business Group
(703)

27. Extra slides

28. To compare the Baseline against the Alternative, define a revenue/cost element structure1
ILLUSTRATIVE
Financial Impact Analysis – Revenue & Cost Element Structure
Unit Pricing
Revenue Element
Quantity
Revenues
Revenue Element
Revenue Element
Baseline or New Alternative
Labor
Materials
Op Ex Costs
Outsourced Contract
Cost Element
Capital Investment
CapEx Costs
Capital Investment