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Proper project decision-making requires that risk management and risk analysis techniques be applied in order to guide management in making better decisions. Cost estimates attempt to define projects as single point values whereas virtually all project variables are variable and may deviate from the values assumed in preparing the original estimate. The objective of this paper is to demonstrate why risk analysis is necessary, and how to determine the probability of having a cost overrun. Some pieces of risk analysis software will be described and range estimating will be demonstrated as an effective tool for reducing risk and for determining how much contingency to add to reduce residual risk to an acceptable level.
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