APPROPRIATE ALLOCATION OF CONTINGENCY USING RISK ANALYSIS METHODOLOGY

Abstract

Many cost overruns in the world of construction are attributable to either unforeseen events or foreseen events for which uncertainty was not appropriately accommodated. It is argued that a significant improvement to project management performance may result from greater attention to the process of analyzing project risks. The objective of this paper is to propose a risk analysis methodology for appropriate allocation of contingency in project cost estimation. In the first step, project risks will be identified. Influence diagramming technique is employed to identify and to show how the risks affect the project cost elements and also the relationships among the risks themselves. The second step is to assess the project costs with regards to the risks under consideration. Using a linguistic approach, the degree of uncertainty of identified project risks is assessed and quantified. The problem of dependency between risks is taken into consideration during this analysis. For the final step, as the main purpose of this paper, a method for allocating appropriate contingency is presented. Two types of contingencies, i.e. project contingency and management reserve are proposed to accommodate the risks. An illustrative example is presented at the end to show the application of the methodology.