Cost-Effectiveness Tool for Evaluating the Management of Terrorist Risks

Principal Investigator:
Robert E. Chapman, Office of Applied Economics, 301-975-2723

Co-Investigators:
Harold E. Marshall, Office of Applied Economics, 301-975-6131
Chi J. Leng, Office of Applied Economics, 301-975-4522

Sponsor:
Building and Fire Research Laboratory (BFRL)

Objective:
To develop a user-friendly tool for building owners and managers to aid in the selection of cost-effective strategies for the management of terrorist and environmental risks.

Approach:
The economic tool under development is a flexible decision methodology, embedded in user-friendly, decision-support software, that helps building/facility owners and managers to maximize the likely reduction in terrorist-related damages while considering tradeoffs among alternative levels of investment in three mitigation strategies. The three mitigation strategies are: (1) enhanced building practices for disaster mitigation; (2) risk-reduction strategies based on insurance; and (3) economic incentives. The economic tool will provide decision makers with the basis for generating a risk mitigation plan that responds to the potential for future terrorist attacks in a financially responsible manner. The software product will consist of a graphical user interface, an “engine” for computing economic measures and evaluating alternative mitigation strategies, and a special-purpose, financial risk module. The design of the integrated software product will build on the expertise that OAE has developed through past software products (e.g., BLCC, BEES, and BridgeLCC), as well as input from our Steering Committee, a cross-section of external subject matter experts. The purpose of the Steering Committee is to insure that the right mix of analysis capabilities is included in the software product.

In FY 2004, OAE will produce a beta version of the integrated software product, leverage its ties with external partners—including the publication of two grant contractor reports (GCRs), and prepare three draft journal articles summarizing different aspects of the project and submit each one to a suitable journal for publication. OAE will continue its outreach efforts focused on creating a strategic collection of collaborative agents.

The production of the beta version of the software product involves a two-stage process. In the first stage, an alpha version is produced which includes all features needed to perform a baseline analysis. Upon completion of the alpha version, it will be presented to the Steering Committee for their review and comments. Once the Steering Committee’s comments have been incorporated, the alpha version of the software product will be tested as part of a collaborative effort between NIST and the Wharton Risk Management and Decision Processes Center. Production of the beta version will incorporate comments from Wharton and augment the alpha version by including a fully functional deterministic sensitivity analysis capability. The beta version will be completed in September and presented to the Steering Committee for their review and comment. The software product will then be field-tested with a team of potential customers drawn from industry and governmental partners.

Work with the Construction Industry Institute (CII) was launched in October 2002 with funding from DTAP. The focus of OAE’s collaboration with CII is to benchmark homeland security construction practices. The goal of this effort is to collect information on 9/11 driven security initiatives from industry leaders. This information will: (1) establish a basis for identifying best practices related to the security of capital facilities projects and (2) provide the basis for assessing the impacts of these practices on key project outcomes. This external collaboration represents an important source of critical data and information for the OAE software product. A key product of this research effort will be a security rating index. The security rating index is intended for use during the planning and project execution phases of capital facilities projects. CII will provide OAE with a draft technical report in December. The CII technical report will then be revised and published as a NIST GCR early in 2004.

Work with the Wharton Risk Management and Decision Processes Center was launched in July 2002. The focus of OAE’s collaboration with Wharton is to examine the opportunities and challenges to encourage safer activities by property owners and firms with respect to extreme events such as natural disasters, technological accidents, and terrorism. Wharton will deliver a draft technical report to OAE in March covering: (1) economic incentives for mitigation of consequences of extreme events; (2) factors leading to successful implementation of mitigation measures; and (3) procedures for estimating potential benefits (both direct and indirect) from alternative mitigation measures and their associated costs. This external collaboration represents an important source of critical data and information for the OAE software product. The Wharton technical report will then be revised and published as a NIST GCR by June 2004.

Economists from OAE will prepare three draft journal articles for publication in refereed journals. The first two articles will build on the two NISTIRs produced in FY 2003. The first article is intended for publication in Cost Engineering; it will describe the analysis framework and illustrate it through a case study of an actual building. The second article will describe the flexible decision methodology. The third article will build on our work with CII. This article will describe the security rating index and illustrate its application to security-related investments in industrial facilities. The American Society of Mechanical Engineers (ASME) initiative on risk analysis and OAE’s efforts are complementary. Our participation in their effort will insure that their guidance document, when finished, will: (1) provide critical data and information for the OAE software product and (2) create both a demand for our software product and a ready distribution channel to their members.

OAE’s participation in the Building Economics Subcommittee (E06.81) of American Society for Testing and Materials International (ASTM) will assess the pros and cons of producing an ASTM standard guide on how to use the flexible decision methodology to create a risk mitigation plan. ASTM standards are an excellent means for disseminating research results to our customers.

Work funded by the EPA Safe Buildings Program is planned to start in October 2003. The focus of this effort is to develop guidance for retrofit of buildings to increase protection from chemical and biological attack. This effort is in collaboration with the Indoor Air Quality and Ventilation Group. Economists from OAE will conduct a cost analysis of selected retrofit options and prepare a computerized protocol to assist decision makers choose among alternative retrofit options. Our participation in this effort will provide an opportunity to test the OAE software product with detailed cost information on selected chemical/biological hazards retrofit options for a case study building.

During FY 2004, OAE will continue its outreach effort through the Steering Committee, Wharton, CII, ASME, ASTM, and the EPA Safe Buildings Program to identify and solidify collaborative relationships with key customer and stakeholder groups.

In FY 2005, OAE will develop and distribute version 1.0 of the integrated software product. Version 1.0 of the software product will draw on extensive testing of the beta version. The version 1.0 software product will produce the types of analysis results that provide decision makers with the basis for generating a risk mitigation plan. Version 1.0 of the integrated software product will include help files to assist users; it will be made available to users either on a CD or for electronic distribution through NIST.

In FY 2006, OAE will develop and distribute version 2.0 of the integrated software product. Version 2.0 of the software product will expand version 1.0 to include a financial risk module, which makes use of Monte Carlo techniques. This will enable users to conduct a rigorous, probabilistic financial risk assessment of alternative mitigation strategies. Version 2.0 will draw on extensive testing of the version 1.0 software product and incorporate suggestions from version 1.0 users. Version 2.0 will include a users manual. Economists from OAE will also develop a training module for the software product. Version 2.0 of the integrated software product will be made available to users either on a CD or for electronic distribution through NIST.

Recent Results:
Chapman and Marshall prepared a white paper outlining the software development effort. OAE used the white paper to solicit stakeholder inputs, create opportunities for collaborative efforts, and form a Steering Committee of external subject matter experts. Marshall prepared a paper entitled “Economic Approaches to Homeland Security for Constructed Facilities” and delivered it at the September 2002 CIB Meeting in Cincinnati as the invited Keynote Address. OAE has put in place collaborative efforts with the Wharton Risk Management and Decision Processes Center, the Construction Industry Institute, the American Society of Mechanical Engineers, the American Society for Testing and Materials, and the EPA Safe Buildings Program. OAE FY 2003 products include: (a) a prototype version of the software; (b) a NISTIR documenting the flexible decision methodology; and (c) a NISTIR illustrating the methodology via a case study building.