Probabilistic Model for Cost Contingency

Abstract

This paper proposes a probabilistic model for the calculation of project cost contingency by considering the expected number of changes and the average cost of change. The model assumes a Poisson arrival pattern for change orders and independent random variables for various change orders. The probability of cost overrun for a given contingency level is calculated. Typical input values to the model are estimated by reviewing several U.S. Army Corps of Engineers project logs, and numerical values of contingency are calculated and presented. The effect of various parameters on the contingency is discussed in detail.