Capital Project Risk Management

Quantitative Risk Modeling & Analysis Report

aiquants Modeling Team

April 2023

Case Overview

In the early stages of 2023, The modeling team at aiquants was approached by a mining company specializing in nickel extraction based in Sweden to carry out a comprehensive quantitative risk analysis for the expansion project for an established nickel concentrator plant, located in the remote region of Kiruna in Norrbotten County, Lapland, located in the northernmost part of Sweden. The aim for the expansion was to enhance the concentrator's throughput by a significant 20%. The cost for the entire project was estimated to be a substantial amount of SEK 60 million (Swedish Kronor).

A nickel concentration facility is often used to separate the metal from the mineral deposit. The process involves several sub-steps, such as crushing, grinding, separation and dehydration. The final products are then transported to and refined in the metallurgical facilities into metals with suitable properties, such as copper and iron alloys. Through further refining a nickel with a purity of 99% is obtained by using electrical cells equipped with inert cathodes.

The plant consists of two distinct parts - the crushing circuit and the flotation circuit. The crushing circuit receives the nickel-bearing ore from the mines and comminutes it to produce a coarse ore that is then fed to the mills. In the flotation circuit, the ore is mixed with water and subjected to treatment to produce the concentrate, which is subsequently dried and further processed in a smelter. The implementation of the expansion project necessitated modifications in both circuits.

The quantitative risk analysis was required to comprehensively assess the potential impact of risks on both the estimated capital expenses (CAPEX) and the project schedule. The project was awarded to a primary contractor who engaged multiple sub-contractors through a transparent open tender process.

Quantitative Risk Analysis Framework

Project Scope of Work

This is the starting point for the quantitative risk analysis, since it explains what must be done as well as allows the project team to assess what types of risks the project is exposed to. The Plant Expansion Project (PEP) scope of work was well-defined. Several technical documents, drawings, and design clarifications were available to structure the cost and time estimates. A detailed project execution plan was also available at the time of starting the quantitative risk analysis.

Work Breakdown Structure (WBS)

The WBS is developed from the scope of work and from the framework of the qualitative and quantitative project risk assessments. The Plant Expansion Project WBS, contained 15 control accounts. Most of the work was outsourced to sub-contractors, and some sub-contractors had multiple control accounts assigned to them.

CAPEX Estimate

The CAPEX estimate is developed with the work breakdown structure (WBS) as one of its primary inputs. Each work package is then be subdivided into a bill of quantities and estimates of the labour required to complete them. It is often found that there are different levels of accuracy for different work packages in the estimate. The method of estimation and the accuracy level of the estimate should be clearly documented by the estimator, since this information will result in better contingency calculations later, as fewer assumptions will be made.

An independent estimating firm estimated the CAPEX for PEP. Under ideal circumstances, the estimator should have obtained quotes for all the control accounts, but this was not possible due to time constraints from the client. The estimator ended up using three techniques to develop the estimate, and indicated the accuracy ranges of each control account based on his risk assessment of each item. The estimated control accounts were classified into three risk items.

• High (-15% to +25%)
• Estimated based on the expert assessment of a discipline engineer, as no drawings existed for these items.


• Medium (-10% to +15%)
• Estimated based on historical information of similar projects, and were typically based on a percentage of the total project capital, or based on a unit rate (e.g., meters of pipe, etc.)


• Low (-5% to +5%)
• Estimated from quotations received from sub-contractors, which were based on detailed design drawings.

Project Schedule

The project schedule should be an accurate reflection of the scope breakdown in the WBS, and should ideally have accuracy ranges for the time and effort estimates, as this simplifies the quantitative risk analysis process. The point estimates in the schedule should also be free from contingency. If a schedule does not have estimate ranges, assumptions must be made at a later stage, which may introduce inaccuracies. The schedule should be accompanied by the basis of schedule document, which includes a description of how the accuracy ranges were determined, and how these ranges were applied to the tasks in the schedule.

The primary contractor developed the PEP schedule based on the time estimates from the primary contractor's engineers, as well as the time estimates received from sub-contractors in their tender responses. The scheduler suggested an estimation accuracy of -5% to +15% for all scheduled activities. This blanket approach was not ideal but, in the absence of better information, was accepted.

Project schedules for large capital projects often run into thousands of lines. Further investigation of the PEP schedule, as well as discussions with the scheduler, showed that it would not be feasible to apply accuracy ranges to each activity due to the differing levels of detail in the schedule. The primary contractor's schedule was typically more detailed than that of the sub-contractors. It was, therefore, decided to identify sub-networks in the schedule and to apply the risk assessment to these sub-networks.

Project Risk Register

The development of a project risk register is part of the risk identification process (Project Management Institute, 2009). During the qualitative risk assessment process, once identified the risks are then subjected to an initial assessment that categorises them into ratings (high/low) of probability of occurrence, and ratings (major/minor) of impact on the project's objectives should the risk materialise.

The risk register is an important input to the quantitative risk assessment, as it brings project-specific risks into the quantitative risk analysis. A representative from the performing organization developed the risk register for the PEP. There were 12 active risks in the risk register at the time the quantitative risk analysis was done. There was one high risk, three significant risks, five medium risks, and three low risks, classified according to a 5 x 5 risk matrix, which scored each risk's probability and impact on a scale of 1 to 5.

Risk/WBS Mapping and quantum Analysis

The Risk/WBS mapping process maps the risk register to the WBS. This mapping should be done at the level where the cost estimate is done, which is usually at the control account level. In this process, each WBS control account is evaluated against the risks in the risk register to determine whether the risk will have cost or time impact.

In addition to the mapping, the impact magnitude (or quantum) of each risk is determined. The impact is either quantified as a specific cost or time increase or decrease, or as a percentage range with a particular distribution. The quantum analysis is then used to quantify the total risk of each control account.

In the analysis of PEP, the risks were mapped to the control accounts in the WBS. It was determined that a number of the risks would have a post-project operational impact, as well as a business case impact.

Uncertainty Range Determination

In this process, the risks that apply to each control account are combined to determine the overall uncertainty range for each control account. This process combines the risk impact from three sources, namely estimation accuracy, project risks, and systemic risks.

Another aspect of range determination is the impact distribution of risks. Probabilistic risk quantification methods rely on the selection of a suitable probability distribution to reflect the way in which the value of an estimated variable is expected to behave in the real world. When a probability distribution is selected, an assumption must be made about the behavior of the variable. It is unlikely that the selected distribution will be an exact fit for the variable, but in most cases an approximation of the distribution is sufficient.

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Simulation

The aPC Portfolio Architecture (in-house), was utilized to execute simultaneously the financial as well as timeline simulations. The recommended reserve regarding the financial as well as duration was at the 80th percentile level, considering a Gaussian distribution, the 80th percentile point is the 80 percent likelihood position within a probability distribution (a stochastically generated financial or timeline magnitude regarding the specific undertaking shall occur lower compared to or equivalent to the the 80th percentile magnitude, 80 percent of the duration).

Result Analysis

The analysis of the Quantitative Risk Analysis results led to much discussion, since the relevant parties traditionally expected higher risk mitigation measures. None of the relevant parties could produce evidence to support their greater expectations, and it turned out that the expectation of a higher value (SEK 60 million), was mainly based on intuition, if not gut feelings. The results of the modeling were accepted without modification.

Contingency Determination

The project team accepted the P80 value for the cost and schedule as the fundamental contingency value. A marginal percentage of the point estimate was incorporated into the contingency to account for business case risks that had not been factored into the project estimate.

Business Case Evaluation

The project remained a exceedingly lucrative project with the suggested provision included.

Final Results (Lots of graphs and analysis left out!---)