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Quantifying Risk in Project Procurement: Case Study – Pima County Regional Wastewater Reclamation Department

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When a utility is faced with the implementation of a significant capital program, conducting a comprehensive analysis to determine the most advantageous model for delivering projects at the lowest possible cost can be a critical component for enhancing the financial viability of the utility. Some of the key components of Effective Utility Management relate to maintaining and enhancing the condition of utility assets at the lowest possible life cycle costs and acceptable risks. But how can risk be considered when determining life cycle costs? Is there a way to quantify and assess risk to help identify the most efficient model for delivering a project? These are the type of questions asked by the Pima County Regional Wastewater Reclamation Department (“PCRWRD”) during a recent evaluation of the most optimal, cost effective project delivery alternative for the design and construction of a new 350 million Water Reclamation Facility.

PCRWRD, working in association with a team of financial and engineering consultants and legal council, developed a risk-adjusted life cycle cost analysis which considered the delivery of a new 32 million gallon per day water reclamation facility under four project delivery alternatives: Construction Manager at Risk (“CMAR”), Design/Build (“DB”), Design/Build/Operate, and Design/Build/Finance/Operate. At the heart the analysis was the development of a Multiple Criteria Risk Model (“Risk Model”) which incorporated the projected operating and capital costs of the facility under each method of project delivery, with consideration for the risk, both retained and transferred, inherent in each alternative.

Employing Monte Carlo simulations using Crystal BallĀ® risk analysis software, the Risk Model was used to analyze the financial and economic impact of the risks for each project delivery alternative that were determined to be quantifiable. Specific operating and financial risks including, for example, construction schedule, tax-exempt interest rates, taxable interest rates, private cost of equity, operating cost inflation, capital cost inflation and discount rates, among numerous others, were identified, and the magnitude of variability of each risk in each alternative was defined. The risk variables were allowed to fluctuate over thousands of trials to generate a range of probable risk adjusted present values of annual costs for each project delivery model. Ultimately, the analysis identified DBO as the project delivery alternative that involved the least amount of risk at the lowest life cycle cost.

By conducting a detailed evaluation of alternative methods of project delivery and the associated design, construction, financial and operational risks, a Utility Director can maximize capital investments and reduce cash flow volatility which, ultimately, can reduce costs and facilitate more predictable rates.
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Keywords: Alternative Project Delivery; Multiple Criteria Analysis; Risk

Document Type: Research Article

Publication date: 2010-01-01

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