Enhancing Risk Calibration Methods

By Christian B. Smart, Ph.D., CCEA
Chief Scientist, Galorath Federal

Abstract
Calibration methods such as the Enhanced Scenario-Based Method allow analysts to establish cost risk analyses that are based on objective data. Some methods currently in use rely on the normal and two-parameter lognormal distributions. Empirical data, however, indicates that a three-parameter lognormal is more appropriate for modeling cost risk. We discuss three-parameter lognormal distributions and how to calibrate cost risk using this distribution. We compare the results with traditional calibration to two-parameter normal and lognormal distributions. Calibration methods that have been published to date typically deal with only the system level, but there is a need to calibrate risk at the WBS level. We present a method for calibration at the WBS level that was developed and implemented at Missile Defense Agency that has been very successful.

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