CONTEMPLATING RISK: Estimating the unknown

Understanding financial risk throughout the entire estimating lifecycle is a crucial factor when preparing a project budget and schedule that meets the expectation of all stakeholders, without surprise.

All too often, project viability decisions are taken based on poor quality estimates and construction schedules which result in both cost and schedule blowouts. In order to calculate an accurate and realistic estimate at complete, it’s critical to continuously think about, and provision for, risk throughout all phases of the capital estimating process. Regardless of estimate confidence, it‘s wise to incorporate a rigid risk management process into your estimate to account for these events.

To quote Donald Rumsfeld in a 2002 press conference:

“There are things we know “Known Facts”; there are things we do not know “Known Unknowns”; and then there are things we do not know, that we do not know “Unknown Unknowns”.

Risk categorizations helps us to transition from the unknown into the known. As an estimate progresses from concept through to feasibility and finally into definitive control budgets, the objective of this process is to reduce risk and maintain the overall project viability. All estimated costs are allocated into one of the three categories below:

Risk Category A "Known Knowns". These costs are based on known facts and definitive design parameters. They are the product of final design and engineering deliverables which can be definitively calculated and costed in detailed bills of quantities.

Risk Category B "Known Unknowns". These are provisional costs allocations for risks based on future design development, execution risk (such as claims, delays, weather), benchmark increases based on nature of work. Historically we know that they occur, yet at the estimate stage they remain mostly unquantifiable.

Risk Category C "Unknown Unknowns". These are cost provisions included into the estimate to provide for unforeseeable risk events. These are the black swans, force majeures, tariff wars, pandemics, and the like. However unlikely these may be, it is prudent to address these potential risk events whether it be through cost and schedule provisions or insurances.

In the illustration below we visualize the categorization of risk into three distinct portions. Risk provisions are adjusted throughout the estimating lifecycle as the project transitions from the unknown into the known; keeping the overall estimate within the viable parameters:

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