A Method for Calculating Cost Correlation among Construction Projects in a Portfolio

One of the important steps in a probabilistic risk assessment is the recognition of the statistical correlation among cost components. Ignoring the correlation results in an underestimation of total cost vari- ance. This becomes even more significant when we are dealing with a portfolio of projects. This may lead to underestimation of budget for the desired confidence level. While there have been several methods proposed to calculate the correlation between components of a project cost, proposing methods to calculate the correla- tion coecient between total costs of projects has been neglected. In this paper a new method is proposed to mathematically calculate the Pearson Correlation Coecient between costs of any two projects in a portfolio of projects. The Proposed Mathematical Model (PMM) is an analytical approach based on the premise of breaking down the total project cost to a base cost (deterministic) and risks cost (probabilistic). The PMM can help determine correlation coecients between total project costs in a portfolio of projects which is a necessary step in probabilistic cost estimation techniques.

[1]  Payam Bakhshi Khayani.  A Bayesian Model for Controlling Cost Overrun in a Portfolio of Construction Projects , 2012 .

[2]  Roger M. Cooke,et al.  Uncertainty Analysis with High Dimensional Dependence Modelling , 2006 .

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

[4]  R. Iman,et al.  A distribution-free approach to inducing rank correlation among input variables , 1982 .

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

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

[7]  I-Tung Yang,et al.  Using Gaussian copula to simulate repetitive projects , 2006 .

[8]  A. Touran,et al.  RANK CORRELATIONS IN SIMULATING CONSTRUCTION COSTS , 1997 .

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

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

[11]  Wei-Chih Wang,et al.  Simulation‐Facilitated Model for Assessing Cost Correlations , 2002 .

[12]  M. Ranasinghe.  Impact of correlation and induced correlation on the estimation of project cost of buildings , 2000 .

[13]  R. Iman,et al.  Rank correlation plots for use with correlated input variables , 1982 .

[14]  Wei-Chih Wang,et al.  MODEL FOR EVALUATING NETWORKS UNDER CORRELATED UNCERTAINTY--NETCOR , 2000 .

[15]  Peter H.M. Janssen.  @Risk: risk analysis and simulation add-in for spreadsheets : version 2.01, for Lotus 1-2-3; version 1.1, for Microsoft Excel. Palisade Corporation. 31 Decker Road, Newfield, New York 14867; (607) 277-8000. $395, $200 academic price, $50 student price. , 1993 .

[16]  Sungbin Cho,et al.  An exploratory project expert system for eliciting correlation coefficient and sequential updating of duration estimation , 2006, Expert Syst. Appl..