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  Risk-Based, Probabilistic Cost Estimating Methods

  Every cost estimate is uncertain. Underestimating construction costs, by owners in the planning or design phases or by contractors in the bidding phase, and with respect to low probability/high impact “black swan” events, can lead to disputes, claims, and litigation. A better understanding of potential costs can help owners budget and get authorization for projects with a reduced chance of cost overruns. A better understanding of potential costs can help contractors in determining an appropriate base cost and margin for bidding, strategies to secure the work in a low-bid environment, and construction management strategies to maximize profit, to avoid loss, and to better manage, and recover costs of, construction changes and claims. This paper will address risk-based probabilistic cost estimating methods that can improve our appreciation of the cost of uncertainty and potential risk events. It will address the uncertainty inherent in predicting the value of any future project element or process and the identification and characterization of potential risk (threats or opportunities) that can impact outcomes.

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