If a company has environmental liabilities, chances are good that its leadership will want to know what it will cost, long-term, to bring them to closure.
The American Society for Testing and Materials recommends several methods of estimating future environmental costs. Most produce a minimum and maximum cost-to-closure, which can be helpful in the decision-making process.
But what if the cost range is, say, $12 million to $45 million? A company would probably like to know more precisely where in that cost range the final costs are likely to land, as well as what can be done to control the risks that drive projects to the high end of that range. Such information can be of great value when negotiating a property’s sale or purchase or setting environmental reserves. It also can be helpful when settling legal claims or selecting the best mitigation alternative.
In these cases, a company might benefit from probabilistic cost forecasting, an estimating technique used to produce not only a minimum, maximum and median cost-to-closure but also the probability of where the cost might end up in that range. Using environmental life cycle diagrams, simulation software and sensitivity analysis, an experienced team can reasonably identify uncertainties on any environmental project.
Environmental Costs Are Skewed
To appreciate the value of probabilistic cost forecasting, consider again an environmental project with an estimated $12 million to $45 million cost-to-closure, with a median cost of $23 million.
Without probabilistic forecasting, a company might be tempted to consider the mid-point cost as the most likely cost-of-closure. But that is a dangerous assumption. Environmental costs typically don’t follow a normal distribution.
By using probabilistic cost forecasting, a company can gain a more complete picture of an estimated range of costs, including the probability of exceeding any given cost and the assumptions driving the most variation.
With this information, a company can better understand its greatest risks and the steps to mitigate them. It is possible, for example, that adding a few more monitoring wells or selecting a different remediation method could reduce some uncertainty, enabling a company to develop a more accurate cost estimate.
The bottom line is that probabilistic cost forecasting is a robust tool that can add real value on projects that pose significant financial risk. On these projects, it can help clarify the uncertainty inherent to environmental projects.
Probabilistic cost forecasting is one of the many tools that can be applied to make your remediation initiatives more successful.
