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Topics: Construction, Cost Management
Contingency Allowance Formulas
Good Evening,

Wanted some brainstorming ideas in regards to Contingency Allowances for projects.

Reading through the internet on this topic, a majority of ideas for producing a contingency seems to be based on opinion.

Typically, what I have used in the past, is the following formula:

1 - ((Total Cost-Admin Cost)/(Total Cost)) x Total Cost = Contingency Allowance Amount

What are some other practices utilized via formulas for Contingency Allowances that you guys have used?
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Tyler -

Why use a contingency allowance formula? Those are harder to justify and frankly, encourage "laziness" in risk management.

I'd suggest identifying and analyzing key risks and let those define your contingency reserves and schedule buffers...

Kiron
I'd have to agree with Kiron.
I strongly agree with Kiron.

Follow the risk management process and its easy to justify even if there are some escalations as assumptions changes with time to time.
I strongly agree with @Kiron based not only in "academic" based on practical experience. Contingency is based on risk. With that said, the way you calculate the risk can vary from company to company.
Agree with all he above. Typically, contingency should be based on risk and the risk appetite of the organization. If your organization has a high risk appetite the amount of contingency will be different than for another organization that has a low risk appetite.
We used to based contingency on a pure percentage of the overall project cost and that of a numerical score (1 to 4) that was assigned to the project based on project risk and complexity. This approach however caused a significant issue for our very large organization. That meant over hundreds of projects (tens of billions of $), the amount of contingency became very significant (typically between 10%-30% of each project budget). This tied up a lot of our capital investment funds which now could not be used for actual capital investment. Quite the dilemma. This also had a compounding effect, because the contingency was usually keep right up to the point when the project closed, even though the perceived risk the supposed continency was based on had long passed.
My advice. take th time and effort to build a cost, risk, and resource loaded schedule, and everyone concerned will have a much clearer idea of how risks can impact project costs and timelines. Any risks that impact those two elements, MUST be incorporated in project scheduling, if not,they are just a list off in a register somewhere that nobody looks at until it is too late.
I just wanted to mention one other thing. Project cost estimates are usually progressively more accurate as the project moves through its lifecycle. So it is very important for all concerned to understand and acknowledge this fundamental fact of nature. As such, cost estimates move from indicative to substantive. As such, contingency fund estimates should also follow that model.
Kiron made a good point.
I see contingency in two parts, both of which are introduced by earlier responses:
1) based on the cost and time estimate accuracy. We use Class A, B, C, D and even E cost estimates and determine an accuracy range (+/- %) for each Class. The Class of estimate is not a matter of effort but rather a recognition of less available information, and

2) Risk allowance based on an impact and probability assessment of risk.

It could be argued that 1) above is also a risk value (the better the estimate the lesser the risk) but, as noted, we tend to apply a percentage rather than detailed analysis.

In complex project we may apply probability theory to came up with a more realistic contingency or allowance based on the assumption that the total sum of the contingencies is not reasonable as they tend to reflect worst case scenarios.

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