Monte Carlo simulation approach to life cycle cost management

Abstract

Public private partnerships (PPP) and private financial initiative (PFI) projects face the challenge of meeting unforeseen future risks. Life cycle cost estimate is a crucial part of PFI/PPP procurement. The traditional deterministic cost model can not take into consideration the uncertainty of future events let alone determine the contingency allowance for the projects. The large number of cost items in the life cycle cost model of building projects makes cost control difficult. Monte Carlo simulation method is applied to the Quantitative Risk Assessment of life cycle costing risk management. A PFI school project was chosen as a case study to demonstrate a new simulation approach to life cycle cost management. The lives and replacement cost rates of building elements are the inputs for the simulation model, while the cumulative life cycle cost are the outputs of the analysis. The sensitivity analysis revealed the cost significant items, which provides the most efficient way for cost control. The results of the analysis identify the high risk life cycle assumptions and provide a variation reference for the decision-makers to define risk and contingency allowance in PFI/PPP projects. The approach can also be applied to other types of building PFI projects.

Keywords:

• life cycle costing
• cost management
• Monte Carlo simulation
• risk management
• cost significant items