171 lines
6.0 KiB
Markdown
171 lines
6.0 KiB
Markdown
---
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id: risk-oriented-estimating
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aliases: []
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tags:
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- topic/estimating
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- topic/risk
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title: Risk Oriented Estimating
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---
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# Risk Oriented Estimating
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Risk-Oriented Estimating (ROE), is a methodology for [[construction-estimating]]
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which:
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* prioritizes estimating tasks,
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* determines necessary [[estimating-detail]]
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ROE leans heavily on [[uncertainty#Value of Information]],
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which challenges the natural tendency to shy from uncertainty
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with the reality of the cost of certainty.
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ROE does not endorse common shortcuts that round up to "cover" uncertainty,
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as these ultimately _increase_ risk by inflating the apparent project cost,
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increasing the probability of loss to a competitor.
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%%
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## Scratch
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Bid risk may fit a [Taleb distribution](https://en.wikipedia.org/wiki/Taleb_distribution).
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Actuarial Science
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%%
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## Prioritizing Tasks
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ROE prioritizes estimating tasks by their contribution to _cost certainty_.
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### Estimating as Risk Mitigation
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* reduce risk of wasted estimation effort due to bid loss
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(prefer lower bid)
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* reduce risk of project overrun
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(prefer higher bid)
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Estimating resources are allocated by Return on Mitigation (RoM)
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## Determining Necessary Detail
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ROE determines the appropriate level of [[estimating-detail]]
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given an organization's [[risk#Risk Tolerance]].
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### EVI Takeoff
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Expected value of information (EVI)
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### Takeoff Optimization
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For systems where EVI analysis determines manual takeoff is still necessary,
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optimizations can be made to decrease the required effort of takeoff,
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and thus the opportunity cost of takeoff.
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Count-based takeoff speed increases with count.
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Optimizing the takeoff process means:
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* _Minimizing_ the need for information outside of drawings
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* _Maximizing_ organizational consistency
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> [!note]
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> Recent events have complicated my philosophy above.
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> It appears that similar efforts have already been made here,
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> their success being a matter of perspective.
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> Is it acceptable that optimal
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#### Naming Conventions (Use Case vs. Description)
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Naming by use case is intuitive for those without estimating or field experience,
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but has the side effect that those accustomed to the names
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will inevitably _treat them as descriptive_.
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| Use Case | Description |
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| ------------------- | ------------- |
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| Hi-Hat | Daisy-Chain |
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| Furnished By Others | Rough-In Only |
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## Potential Objections
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Objections to the use of historical data in new estimates are not unfounded. A
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framework to do so competently and consistently does not currently exist.
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> [!info]
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> Nor does the software necessary to utilize such a framework efficiently.
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The goal in and of itself ought not be controversial, however.
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Businesses regularly make far riskier decisions based on projections
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informed by the same data.
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By definition, if one could adjust historical pricing accurately for all dependent factors,
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the adjusted price would be accurate to the new job.
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The issue is that there are hundreds to thousands of potential dependent factors.
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A nonstarter for uncreative minds,
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but a worthwhile challenge for estimators truly passionate about their field.
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It is unique of construction estimating among similar fields
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that analysis and discussion of risk is largely absent from pre-approval review.
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The tools common of our trade almost always lack the means
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to quantify the dollar amount implications of our assumptions.
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There is an enormous gap in complexity between pure square foot pricing and
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[[traditional-estimating-methods]] that tools do not exist to bridge.
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> [!aside]
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> The refusal to acknowledge the potential for more "complex" estimate models
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> hints at issues of organizational ignorance described ~~elsewhere in this vault~~.
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At all points in the estimating process,
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It should be possible to give a confident budget.
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## In Comparison
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For most contractors, there is not usually a minimum amount of project detail
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required to provide a budget for a project
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Estimators know what the most likely and most expensive options are for a given scope
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and can fill in the detail required for item-oriented takeoff.
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This is called an **assumption** and is the basis of cost estimation.
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Assumptions are fundamentally incompatible with item-oriented estimating as it is commonly implemented.
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It is not possible to compare price possibilities
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except by creating separate takeoffs and breakdowns for each one.
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Rather than building the job one `WOOD NAIL - GALV STEEL - #10 - 5-INCH` at a time,
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risk-oriented estimating focuses on reducing risk of a decent budget.
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Risk-oriented estimating understands a `NAIL` like an estimator:
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an abstract item in a certain price range requiring labor in a certain hour range.
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A practitioner of this style would find
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that the impact of such details on the final price of a job
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are so low as to be trivial.
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Not to say that they shouldn't be addressed,
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only that they ought not be addressed before more significant factors.
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Risk is a measure of the effect of uncertainty on outcome.
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Uncertainty being a necessity of estimating,
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the language and tools that we use
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must facilitate discussions of risk management.
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In estimation in fields other than construction
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it is common to give an estimate as a _confidence interval_,
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a range in which a result has a certain percentage chance to fall.
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This interval can be determined from a population of possible prices.
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The _accuracy_ of a risk-oriented estimate remains roughly the same
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(approaching 100% with continuous input)
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through the takeoff process and, assuming no incorrect input,
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is entirely out of the hands of the estimator doing the "takeoff".
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The previous chapters describe how a centralized system
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separates the concerns of adjustment factors
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and data input for individual projects.
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The "takeoff" workflow then is not about progressively approaching the target
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price as with item-oriented methods,
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but reducing the range of possible target prices,
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reducing the risk of the estimate.
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Abandoning an item-oriented estimate
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at any point before 100% completion
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results in effectively 100% wasted effort.
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In contrast, an abandoned risk-oriented estimate
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becomes a budget with no additional effort.
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