The Owner's Role in Project Risk Management (2005) / Chapter Skim
Currently Skimming:
6 Contingency
6 Contingency
Pages 52-60
The Chapter Skim interface presents what we've algorithmically identified as the most significant single chunk of text within every page in the chapter.
Select key terms on the right to highlight them within pages of the chapter.
From page 52... ...
When used to absorb the impacts of project uncertainty, the contingency is a form of risk mitigation, and so in evaluating potential project contingency funding, owners should apply risk assessment and probabilistic estimating techniques. However, contingency should not be a first alternative and should be used only as part of a complete risk mitigation effort.
|
From page 53... ...
Accounting for Random Error Versus Systematic Error An example may help in illustrating the point. Suppose that someone tabulates the number of valves used on a substantial set of previous similar projects and finds that, in every case, the number of valves actually installed was always 1.17 times the number of valves counted on the engineering drawings by the quantity surveyor.
|
From page 54... ...
This usage can cause confusion: Some project personnel, assuming the contingency addresses systematic error or bias, expect that they are entitled to use it all up, whereas others, who believe it is allocated to cover random error or chance, expect that contingency funds will be left over and ought to be returned to the project sponsor. Not surprisingly, those who expect to expend all contingency funds tend to be project managers, and those who expect to see at least some of the contingency allowance returned tend to be owners.
|
From page 55... ...
The risk of overrun is thus the probability that the actual cost or duration would be greater than the mean plus the contingency. If the project cost is considered a random variable with an associated mean value, the deterministic or single-point value that is typically quoted as the project or activity estimate may not bear any relationship to the mean or expected value of its probability distribution.
|
From page 56... ...
If the cost estimates for all the work packages in a project are known to be the mean values of their individual distributions, then the mean value of the total project would be the sum of these values and the contingency could be added to it. However, individual work package estimates are seldom the mean values of their distributions.
|
From page 57... ...
. Therefore, summing the estimates for all work packages without the discipline of using their mean values will result in a total cost estimate that includes unknown uncertainty.
|
From page 58... ...
The use of established values is a questionable practice as it encourages project managers to use these values instead of performing project-specific risk assessments. For example, a contingency percentage that might be adequate for some conventional infrastructure projects will be totally inappropriate for big science projects, waste remediation projects, and one-of-a-kind or first-of-a-kind projects, for which the technology may be new and unproven or the volume and characterization of the wastes uncertain, and which may need to retain much larger contingencies even at the final design stage.
|
From page 59... ...
Second, another purpose of contingency is risk mitigation, which is required not because of omissions in making estimates or any other uncertainty at the activity level but rather to allow for unknowns at the overall project level. For example, a capital acquisition project that is really a research and development project may depend on new technology, which requires more project-level contingency; or a waste remediation project may need a contingency to cover the possibility that the in situ waste may differ from the original characterization.
|
From page 60... ...
60 THE OWNER'S ROLE IN PROJECT RISK MANAGEMENT tract, the owner needs to hold some contingency to cover potential change orders. Contingency policies need to distinguish between fixed-price, costplus, cost plus incentive fee, and other common types of contracts in the discussion of risk and contingency and should state whether contingency is controlled at the project director level or at the owner's program level.
|
Key Terms
This material may be derived from roughly machine-read images, and so is provided only to facilitate research.
More
information on Chapter Skim is available.