Question
A planned construction project's target cost (risks not considered) is $30 Million and its profit margin is $3 million (meaning that the client pays the
A planned construction project's target cost (risks not considered) is $30 Million and its profit margin is $3 million (meaning that the client pays the construction company $33 million for the completed job). However, common construction risks (shown in column A) can jeopardize this project margin to the point of potentially resulting in a loss. For example, if the impacts of the risks are severe enough to make the costs go over $33 million, then the construction company would obviously incur a loss. The project manager would like to model how risks and the implemented risk responses affect the project margin because the company CFO will only approve proceeding with the project if there is a 90% or higher likelihood that the project's (risk-adjusted) profit margin will exceed $1,200,000. You can assume that the cost impact of each risk is normally distributed with the means and standard deviations shown. Risk responses lower the probability of risk occurrence (but not the impact). The expected impact is the product of the probability and the impact. The required formulas are included, so you do not need to enter any formulas (but you should understand them!) You only need to run a Monte Carlo simulation. Watch the video to see how this simulation is run, and then run the simulation. Based on the simulation results, determine whether or not the CFO will approve this project, and why, and then explain in the Week 3 discussion how you arrived at this conclusion. Attach the cumulative probability distribution chart or a screenshot of it (from the Crystal Ball simulation) to justify your conclusion.
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