An Overview of Budget Contingency Calculation Methods in Construction Industry

Abstract

Due to risks and uncertainties associated with construction projects, owner agencies usually add a reserve amount to the estimated project cost. This reserve amount, known as contingency, is to absorb the monetary impact of the risks/uncertainties and to prevent cost overrun. Over the past two decades, many contingency calculation methods for construction projects have been introduced by practitioners and researchers. These methods can be ranged from simply considering a percentage of the project base cost to complex mathematical methods. Each of these methods suggests an approach for calculating contingency using different assumptions. The question is which one of these methods should be applied to a certain project at a specific phase. Knowing the advantages and disadvantages of each method can help practitioners in construction industry select the best method based upon their project characteristics, budget, and time. This paper compiles almost all contingency calculations methods and divides them into three main categories of: (1) deterministic methods, (2) probabilistic methods, and (3) modern mathematical methods. Each of these categories are then divided into more subcategories and discussed in detail.