Contingency

In document Project Cost Estimating Manual.pdf (Page 74-77)

Contingency applications for various types of cost estimates cover the entire cycle of a project, from feasibility through execution to closeout. Guidelines presented in this section provide a standard approach to determine Project contingency and improve the understanding of contingency in the Project management process.

Contingency is used for managing risks on a project and can be in many forms. It may be a cost allowance in the Project cost estimate to account for the risk retained; a time allowance in the programme of work for delays, such as extreme weather; or a contingency process in case an event occurs. Contingency amounts should be reassessed at review points during the Project life cycle to reflect current knowledge and level of uncertainty with a view to forecast the most likely outcome.

3.7.1 Contingency definitions

3.7.1.1 General Contingency

Contingency is an integral part of the total estimated costs of a project. Definition as adopted by the American Association of Cost Engineers is:

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“Specific provision for unforeseeable elements of cost within the defined project scope.

[Contingency is] particularly important where previous experience relating estimates and actual costs has shown that unforeseeable events, which will increase costs, are likely to occur”

3.7.1.2 Buried Contingencies

Some Estimators seek to hide contingency provisions to doubly ensure that the final value of the Project does not go over the budget. This is known as buried contingency. All external and internal Estimators should refrain from burying extra contingency allowances within the estimate. A culture of honesty should be promoted so that it is not necessary to bury contingency. Further, estimators should be aware that the buried contingency would be identified during estimate reviews. The estimate reviewer is obligated to remove the buried contingency.

3.7.2 Exclusions

Contingency amounts should not be used to cover all consequences. It is important, therefore, to understand the limitations imposed. These limitations include the following:

• Contingency does not cover changes in the scope of a project. Contingencies reflect the allowance for varying circumstances only within the approved scope of the Project. If the scope of a project has been changed, then the project will need to be justified again. This is required each time the scope is revised.

• Contingency is limited to the events that are foreseeable and pose a risk to the Project in terms of their perceived likelihood and consequence. These are also sometimes referred to as known risks.

• Project contingency excludes those events that are unknown in terms of their existence and likelihood of occurrence.

3.7.3 Applying contingencies

Estimators shall carry out a detailed analysis of all the identified risks in accordance to the process as defined in DoT’s PRMM. Estimators for others clients should use their respective risk management process. Descriptions of each contingency allowance and justification must be documented in writing. If extraordinary conditions exist that call for higher contingencies, the rationale and basis should be documented in the estimate.

3.7.4 Quantification of contingencies

Because of the uncertain nature of the assessment process, it is difficult to be prescriptive as to how contingency costs should be estimated. Estimators preparing estimates for DoT are required to follow the procedures as described in the DoT’s PRMM. Estimators for other clients should use their applicable guidelines. Standard ranges for contingencies have been provided below to guide the Estimator. Estimators and PMs must use their experience and professional judgement to weigh competing factors to arrive at the most likely value. Historical events may be used as a guide.

Table 3-6 presents the contingency allowances by type of construction estimate for the standard estimate types. Estimate types shown in Table 3-6 are primarily an indication of the degree of completeness of the design. For current working estimates, contingency depends upon the completeness of design, procurement, and construction. An independent estimate may occur at any time, and the corresponding contingency can be used.

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Table 3-6: Contingency allowance guide by type of estimate Type of Estimate Overall Contingency

Allowance Includes

An assessment of risk is required to be carried out and included under

An assessment of risk is required to be carried out and included under contingency item of BoQ.

CONCEPT Up to 20% An assessment of risk is required to be

carried out and included under contingency item of BoQ.

PRELIMINARY

DESIGN Up to 15% An assessment of risk is required to be

carried out and included under contingency item of BoQ.

DETAILED DESIGN Up to 10% (Generally 5% to 7% for projects where scope is reasonably defined)

An assessment of risk is required to be carried out and included under contingency item of BoQ. However, for known work items, but unknown scope, the estimated amount should be included under provisional sum.

TENDER STAGE 3% to 5% adjusted to

suit market conditions 3 percent to 5 percent represents the residual risk for the Project. At this stage most of the risk would have been either taken care in design or rates. For known work items (say landscaping) but unknown scope, the estimated amount should be included under provisional sum.

Range stated in Table 3-6 reflects the maximum standard allowable contingency in an estimate (including design-build contract, cost-plus contract, etc.). Contingency should cover all appropriate risks and uncertainties.

The contingencies are calculated and included in the contingency section of the estimate, as shown in the standard templates in Appendix L. It should be noted that, upon inclusion of the assessed amount of contingency in an estimate, if the percentage of contingency with respect to the overall estimate is more that the range as provided in the above table, the Estimator is required to reassess the risk and uncertainties by gathering more data on the Project. Generally, larger the Project, lesser is the overall percentage of the contingency.

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3.7.5 Reviewing contingencies

Risks should be reviewed at intervals throughout the Project life cycle and updated to reflect the most recent level of uncertainty surrounding the Project. Contingencies should reflect the current level of risk. Sometimes risks for which contingencies were provided early in the Project may, at some later time, be overcome by further investigation or modification of the design.

For example, a contingency allowance for stabilisation/rock excavation early in the Project may be replaced by specific quantities and costs following a geotechnical investigation with no residual uncertainty. This highlights the importance of updating and identifying contingencies separately from the base cost of work activities, and for the recording of reasons for their inclusion. Risk registers provide a convenient place to record such decisions.

In document Project Cost Estimating Manual.pdf (Page 74-77)