Using Risk Analysis to Determine Construction Project Contingencies

Abstract

A contingency allowance is an amount of money used to provide for uncertainties associated with a construction project. Traditionally, it is a percentage addition on top of the base estimate. Estimating using risk analysis (ERA) is a methodology that can be used to substantiate the contingency by identifying uncertainties and estimating their financial implications. A study of the effect of ERA was carried out to compare the variability and consistency of the contingency estimates between non-ERA and ERA projects. This paper presents results of a survey that compares a total of 287 non-ERA and 45 ERA projects. The results show a highly significant difference in variation and consistency between these groups. It indicates successful use of the ERA method for public works projects to reduce unnecessary and exaggerated allowance for risk. However, the contingency allowance for ERA projects was still considered high. Improvement and refinement of the ERA method as well as recommendations on capital budgeting policy are suggested.