Impact of correlation and induced correlation on the estimation of project cost of buildings

Treatment of correlation between variables is necessary for deriving any theoretical distribution of the project cost of buildings. This paper highlights some often ignored theoretical requirements necessary for a rigorous treatment of correlations. The condition for a positive definite correlation matrix is described, along with an analytical procedure and a computer program developed to verify the positive definite condition when correlation coefficients between input variables are estimated using historical data. The analytical procedure and the developed computer program can be used in any application that obtains correlation information from historical data or as subjective judgements to be used in a functional relationship. A new concept called induced correlation is suggested to define and to treat correlation between derived variables that arise from the common (shared) primary variables in their functional forms. A published numerical example is used to highlight the stages where correlation between variables can have an impact on the estimation of moments (estimated expected value and estimated standard deviation) for the project cost of buildings, and to demonstrate the improvement in the estimation of the standard deviation of project cost as a result of treating correlations in risk analysis.

[1]  Hugh G. Campbell.  Matrices With Applications , 1968 .

[2]  Wayne S. Smith,et al.  Interactive Elicitation of Opinion for a Normal Linear Model , 1980 .

[3]  G. Gregory.  The Evaluation of Risk in Business Investment , 1981 .

[4]  Hon-Shiang Lau,et al.  A Four-Moments Alternative to Simulation for a Class of Stochastic Management Models , 1982 .

[5]  J. Schmee.  Matrices with Applications in Statistics , 1982 .

[6]  J. Perry,et al.  RISK AND ITS MANAGEMENT IN CONSTRUCTION PROJECTS. , 1985 .

[7]  Roger Flanagan,et al.  Life cycle costing and risk management , 1987 .

[8]  Colin M. Sorrill.  Risk Analysis for Large Projects: Models, Methods and Cases , 1987 .

[9]  石谷 久.  Risk Analysis for Large Projects-Models, Methods & Cases. Dale Cooper & Chris Chapman著 John Wiley & Sons.(1987) , 1988 .

[10]  Ali Jaafari.  Project Viability and Economic Risk Analysis , 1988 .

[11]  E. Ziegel.  Introduction to the Theory and Practice of Econometrics , 1989 .

[12]  Alan D. Russell,et al.  Analytical approach for economic risk quantification of large engineering projects , 1992 .

[13]  Ali Touran,et al.  Monte Carlo Technique with Correlated Random Variables , 1992 .

[14]  M. Ranasinghe,et al.  TREATMENT OF CORRELATION FOR RISK ANALYSIS OF ENGINEERING PROJECTS , 1992 .

[15]  A. Touran.  Probabilistic Cost Estimating with Subjective Correlations , 1993 .

[16]  Malik Ranasinghe,et al.  Contingency allocation and management for building projects , 1994 .

[17]  Kwong Wing Chau,et al.  Monte Carlo simulation of construction costs using subjective data , 1995 .

[18]  David M. Wall,et al.  Distributions and correlations in Monte Carlo simulation , 1997 .