Monte Carlo simulations in project budgeting
Most budget plans in Łódź companies rely on a single optimistic scenario that rarely works in reality. Mathematics has no emotions and allows us to see what an experienced CFO's intuition will miss. We use the Monte Carlo method to provide a specific probability of your investment's financial success instead of guessing.
Why a static Excel sheet is a trap
Traditional budgeting involves entering fixed amounts into a table for materials, labor, and transport, then adding a 5% or 10% 'margin of error'. In July 2024, we saw a production hall modernization project in Zgierz where such a margin evaporated within the first 11 days due to a sudden 14% jump in steel prices. A static model doesn't account for the fact that prices don't change in a straight line. By using one number as a certainty, you are deceiving yourself because you ignore the market volatility that is a natural element of every tender.
At Konsens Logika, we work on the assumption that every item in a budget is a range, not a point. Instead of writing that concrete costs 400 PLN per cubic meter, we define that it costs between 385 PLN and 440 PLN, depending on availability and logistics. This allows us to avoid a situation where, after three months of project implementation, 124,000 PLN is missing to complete the finishing work. Numbers speak louder than a bluff, and a static sheet is most often exactly such an unconscious bluff to oneself and the investor.
A static Excel sheet is most often an unconscious bluff to oneself and the investor.
The mechanism of 1,134 scenarios in 12 minutes
A Monte Carlo simulation isn't black magic, but repeatedly performing calculations with random input data. Our system performs exactly 1,134 calculation trials in just 12 minutes, changing parameters each time according to an established probability distribution. It's as if you lived through the same project 1,134 times in different market conditions before you actually spend the first cent. Thanks to this, we know that in 83 cases out of 100, you will close at 2.4 million PLN, but there's a 17% chance you will need additional funds.
During an analysis for a wholesaler near Kilińskiego Street in Łódź, we checked 12 behavioral variants of energy and fuel suppliers. The simulation result clearly showed that their original budget had only a 23% chance of holding up through the full calendar year. We corrected the plan based on hard data, which avoided downtime in the fourth quarter. Your rival has already calculated their chances, so relying on a single scenario is voluntarily giving ground to the competition.
It's as if you lived through the same project 1,134 times in different market conditions.
Practical application of game theory
In project budgeting, you aren't just playing against the market, but often against other tender participants. Mathematical negotiation models allow us to estimate when it's worth raising the stake and when to withdraw from bidding. (By the way, many of our clients are surprised that giving up a project after mathematical analysis is sometimes more profitable than winning it at any cost). In Monte Carlo analyses, we include not just your costs, but also the likely moves of your rivals, giving us a picture of the full economic battlefield.
Our experience with 47 served projects shows that the most money leaks through so-called 'bottlenecks' that aren't visible at first glance. It could be a 4-day delay in the delivery of one specific part, which holds up a team of 9 specialists. A simulation catches such correlations. If the probability of a blockage exceeds 31%, we suggest changing the purchasing strategy before signing the main contract. This is a concrete saving that can be converted into man-hours and real net profit.
How to read simulation results
The result of our work isn't another thick folder with an opinion, but a specific probability chart we call the 'certainty curve'. If you want to be 91% certain that the project will succeed, you must secure amount X. If you accept risk at 47%, amount Y is enough. You make the business decision, but we provide you with a precise measure of risk. We don't promise that problems won't occur — we promise that you will know how much it costs to solve them before they actually appear.
At Konsens Logika, we don't use empty phrases about safety. Instead, we show that the average estimation error in projects run without simulations is about 18.5% in our industry. We reduce this uncertainty to a level that allows for calm long-term investment planning. We usually send an answer to an inquiry for such an analysis within 5-6 business hours, because we know that in business, time is the only currency that cannot be recovered through any optimizations.
Implementing the method in your company
One can start with the single most risky stage of a current project. You don't have to immediately recalculate the entire company structure for 5 years ahead. We only need a list of 15-20 key cost variables and your previous assumptions. Our team, consisting of 5 analysts working in the office at Kilińskiego 86, will process this data and prepare a report that clears up doubts about your budget's reality. Mathematics has no emotions, so our assessment will be harsh but true.
Remember that Monte Carlo modeling is a tool for pragmatists. If you're looking for confirmation of your wishes, this isn't the service for you. However, if you want to know if your budget will survive a confrontation with market reality in Q4 2024, the numbers will give you the only reliable answer. We invite you for a 20-minute talk where we will show, using a specific example, how 12 minutes of simulation can save your margin from an uncontrolled drop.
