Contingency Allocation for Large Infrastructure Projects

Risk Analysis is an important tool that has evolved over the years, and has become ingrained in the project management best practices. While Risk Analysis has been used predominantly in finance and insurance industries, its use in construction is maturing. As raising capital becomes increasingly competitive, organizations are looking at ways to optimize their cash reserves with the use of project management best practices.

Over the years, public agencies have been allocating contingency to projects based on empirical methods. Recently, some agencies have begun embracing Risk Management as a tool to identify, qualify, and quantify risk-based contingency. This presentation discusses the life cycle of a risk management process, which has been helping projects properly forecast total project costs and reduce uncertainty.

The stakeholders involved in the Risk Identification Meeting brainstorm threats and opportunities, which are then prioritized using Qualitative Risk Analysis. This prioritization is accomplished by considering multi-objective schedule and cost probability-impact ratings along with manageability. The top risks from the qualitative process are used in developing a quantitative schedule and cost risk model. The schedule and cost risk analysis results are integrated to calculate the total risk-based cost contingency required by the project. Finally, the risk-based cost contingency along with the project estimate are used in computing multi-year capital forecasting.

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