Management of construction cost contingency covering upside and downside risks

Abstract

Many contractors are of the opinion that adding contingency funds to the tender price of a project may lead to loss of the tender. This research is a trial to put an end to this incorrect opinion. A more mature attitude to risk would recognize that contingency exists to be spent in order to avoid or minimize threats and to exploit or maximize opportunities. This research proposes an approach for determination and monitoring of Cost Contingency Reserve (CCR) for a project. Control of CCR is interfaced with Earned Value Management. Application to a real project is carried out. Post-mitigation simulations show that value of CCR is 2.88% of project cost but there is a potential saving due to opportunities. The project is monitored after eight months from its assumed start date with one assumed emergent risk. The final results are as follows: CCR is enough to cover project current and residual threats and the contractor has a considerable amount of money that will be transferred to his margin at project closure assuming the project will not be exposed to additional emergent risks. A contractor can balance project upside risks and its downsides to increase his chance to win tender of the project.