Research on VaR-Model-Based Analysis of Construction Cost Risks

Abstract

Construction cost risk management is an essential part of construction cost management,especially in the context of the ‘triple overrun’ that has been rampant across China over the last few years,i.e. the cost overrunning the budget,the budget overrunning the budgetary estimate, and the budgetary estimate overrunning the initial estimate. Since traditional methods of calculating construction reserve funds fail to serve the purpose of curbing the ‘triple overrun’,we deem it necessary to establish a quantitative, rational, and accurate calculation and analytical model to measure basic reserve funds. This paper aims to provide an analytical model based on the VaR technique, where parameters are determined by VaR’s three key factors, and a standard VaR process of analyzing basic reserve funds is set up. The model proves to be effective in our case study when basic reserve funds predicted by the model well match the actual ones,which is shown clearly by the Q-Q plot curves and CDF curves.