Risks, Classification of Estimates, and Contingency Management

Abstract

Risks of cost overruns are invariably present in major projects. Cost risks can be managed. The management of cost risks begins with a systematic risk evaluation and appropriate allocation of contingency. This paper proposes and discusses an enhanced capital‐cost and contingency‐estimating concept and system. The proposed estimating system combines aspects of the conventional “classes of estimate” approach with a statistical method. The latter uses range estimates and applies the theory of probability for risk assessment and contingency estimation. By using the range estimates, the experience of an expert estimator and his level of confidence on the estimates can be expressed. A two‐tiered contingency‐allocation system using an engineering allowance and a management contingency are discussed. This system is suitable for both major project promoters and contractors involved in preproject planning and cost estimation.