Contingency estimation for construction projects through risk analysis

Construction organizations are constantly seeking ways to avoid failure and contain risks early on in the project life-cycle. One such approach to handle risks is through the allocation of 'suitable' contingency or reserve. However, when it comes to determining this suitable contingency fund, project personnel often face difficulty. In order to provide a logical basis upon which to allocate contingency to projects, a methodology that incorporates risk assessment is presented. Based on subjective judgment sought from the project personnel regarding the likelihood and severity of risks in their project, the degree of risk of the project is determined. Contingency funds are then allocated based on this quantified degree of risk. The developed methodology was applied to a hydropower project to check the adequacy of the contingency fund allocated. All the construction risks were identified for these projects. Their effects were quantified by determining the probability and severity using the Analytical Hierarchy Process (AHP). Ranging was also performed on Bill of Quantity items. An Activity/Risk factor matrix was developed, which was then used as an input to the Monte Carlo simulation to combine the risk distributions of various BOQ items. This resulted in a risk adjusted cost from which the contingency was determined.