Private - Probabilistic Cost Analysis (2 Days)
About course

At the time of project authorization decisions, cost uncertainty is generally expressed in funds allocated as contingency, escalation, and reserves. This course will clearly contrast these three types of cost allocations for uncertainty, and provide practical methods for determining their value to support the investment decision-making process. The objective of the course is for each participant in the capital project process to develop an understanding of the related project cost uncertainties of estimate contingency, escalation, and reserves.

Course features

Upon completion of this course, participants will be able to: 

  • Understand the related concepts of uncertainty, risks, threats, and opportunities.
  • Learn about risk identification and quantification to support estimate contingency determination
  • Understand the development and use of risk analysis models to effectively determine estimate contingency for all phases of your projects.
  • Understand how to develop effective escalation models, and apply them to your projects.
  • Understand the concept of reserves, and when they should be used.
  • Provide practical exercises on implementing probabilistic cost analysis into your projects.
Course outline

Day 1

Day 1 begins with developing an understanding of fundamental statistics and probability theory required to effectively assess uncertainty. This leads to discussions on identifying the risks and uncertainties that affect project estimates; and developing models to quantify the contingency required to achieve a stated level of confidence in our project estimates.

Introduction to Assessing Uncertainty

  • Concepts in Uncertainty

  • Probability and Statistics

  • Understanding Probability Distributions

  • Monte Carlo Simulations

Contingency Determination

  • Risk Identification

    • Systemic Risks

    • Project Specific Risks

      • Root Cause Determination

    • Risk Correlations

  • Building Risk Analysis Models

    • Parametric Models

    • Range Estimating Using Monte Carlo Analysis

    • Expected Value Analysis Using Monte Carlo Analysis

  • Understanding Risk Model Results

  • Contingency Determination to Support Risk Management

Day 2

Day 2 starts with focusing on the related risk element in project estimates of potential price increases over time. The dual contributions of inflation and market conditions to escalation will be addressed. How to utilize economic price indices and knowledge of our capital projects to effectively assess the escalation values required in our estimates to address price increases over the project lifecycle will be discussed. Next, the course provides discussion of reserves as a separate account for discrete risk events that are not under the control of the project team. Finally, practical workshop exercises are undertaken that focus on implementing probabilistic cost analysis.


  • Definitions

    • Inflation

    • Price Index

    • Market Conditions

  • The Limitations of Price Indices

  • Developing Composite Price Indices

  • Adjusting for Market Conditions

  • Determining Cash Flow

  • Calculating Escalation

  • Applying Probability Analysis to Escalation Models


  • Reserves versus Contingency

  • Discrete Risk Events

  • Reserve Determination to Support Risk Management

  • Project versus Portfolio Issues

Practical Probabilistic Cost Management

  • Workshop Exercises on implementing probabilistic cost analysis

Course information
Duration: 14 hours hours
Earn: 14 PDUs
Delivery Method: Virtual or Traditional Classroom