Risk Based Contingency in Project Cost Estimates

Abstract

Project Cost estimation is carried out for making investment decisions. Cost estimation is carried out during different phases of the project. Contingency in cost estimation is an important factor before releasing final cost estimate for formal approval of the project by senior management. Major Petrochemical companies use risk-based contingency calculation instead of following a standard practice of adding a certain fixed percentage to the final project cost estimate. In this chapter, cost contingency calculation methodology has been elaborated by conducting case study of a sample project. The methodology described here uses famous tool of Monte Carlo for simulation. It is pragmatic approach to calculate required cost contingency in the project cost estimate, based upon the particular project risks as compared to simply following rule of adding fixed percentage of the estimate as cost contingency in overall project cost estimate.