Costing of Projects with Monte-Carlo simulation
This simple model estimates the cost of a project in a manufacturing plant. A traditional contingency analysis has been prepared, but we are concerned that an offer of $82 million will significantly reduce the chances of winning the project. Our task is to find the lowest amount the company can bid, while confident that there is only a 5% chance of exceeding the estimated costs and losing money on the project.
1. Most projects exceed the base cost estimate due to factors beyond the control of even the most competent PM. The sources of these excesses are numerous and it is important to develop an accurate contingency budget.
2. In this case, the six assumptions represent the six major cost components of the project: project management, engineering, capital equipment, construction, administrative costs, and environmental and safety compliance costs.
3. After running a simulation, you will see the forecast graph for the total cost of the project. By moving the certainty getters we can find the probability of spending different amounts on this project.