Cost Contingency
   HOME

TheInfoList



OR:

When estimating the cost for a
project A project is any undertaking, carried out individually or collaboratively and possibly involving research or design, that is carefully planned to achieve a particular goal. An alternative view sees a project managerially as a sequence of even ...
, product or other item or investment, there is always
uncertainty Uncertainty refers to epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to physical measurements that are already made, or to the unknown. Uncertainty arises in partially observable or ...
as to the precise content of all items in the estimate, how work will be performed, what work conditions will be like when the project is executed and so on. These uncertainties are
risks In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environme ...
to the
project A project is any undertaking, carried out individually or collaboratively and possibly involving research or design, that is carefully planned to achieve a particular goal. An alternative view sees a project managerially as a sequence of even ...
. Some refer to these risks as "known-unknowns" because the estimator is aware of them, and based on past experience, can even estimate their probable costs. The estimated costs of the known-unknowns is referred to by cost estimators as cost contingency. Contingency "refers to costs that will probably occur based on past experience, but with some uncertainty regarding the amount. The term is not used as a catchall to cover ignorance. It is poor engineering and poor philosophy to make second-rate estimates and then try to satisfy them by using a large contingency account. The contingency allowance is designed to cover items of cost which are not known exactly at the time of the estimate but which will occur on a statistical basis." The cost contingency which is included in a
cost estimate A cost estimate is the approximation of the cost of a program, project, or operation. The cost estimate is the product of the cost estimating process. The cost estimate has a single total value and may have identifiable component values. A problem ...
, bid, or budget may be classified as to its general purpose, that is what it is intended to provide for. For a class 1 construction cost estimate, usually needed for a bid estimate, the contingency may be classified as an estimating and contracting contingency. This is intended to provide compensation for "estimating accuracy based on quantities assumed or measured, unanticipated market conditions, scheduling delays and acceleration issues, lack of bidding competition, subcontractor defaults, and interfacing omissions between various work categories." Additional classifications of contingency may be included at various stages of a project's life, including design contingency, or design definition contingency, or design growth contingency, and change order contingency (although these may be more properly called allowances).
AACE International AACE International (Association for the Advancement of Cost Engineering) was founded in 1956 by 59 cost estimators and cost engineers during the organizational meeting of the American Association of Cost Engineering at the University of New Hamps ...
has defined contingency as "An amount added to an estimate to allow for items, conditions, or events for which the state, occurrence, or effect is uncertain and that experience shows will likely result, in aggregate, in additional costs. Typically estimated using statistical analysis or judgment based on past asset or project experience. Contingency usually excludes: # Major scope changes such as changes in end product specification, capacities, building sizes, and location of the asset or project # Extraordinary events such as major strikes and natural disasters # Management reserves # Escalation and currency effects Some of the items, conditions, or events for which the state, occurrence, and/or effect is uncertain include, but are not limited to, planning and estimating errors and omissions, minor price fluctuations (other than general escalation), design developments and changes within the scope, and variations in market and environmental conditions. Contingency is generally included in most estimates, and is expected to be expended". A key phrase above is that it is "''expected to be expended''". In other words, it is an item in an estimate like any other, and should be estimated and included in every estimate and every budget. Because management often thinks contingency money is "fat" that is not needed if a project team does its job well, it is a controversial topic. In general, there are four classes of methods used to estimate contingency. ." These include the following: # Expert judgment # Predetermined guidelines (with varying degrees of judgment and empiricism used) # Simulation analysis (primarily risk analysis judgment incorporated in a simulation such as
Monte-Carlo Monte Carlo (; ; french: Monte-Carlo , or colloquially ''Monte-Carl'' ; lij, Munte Carlu ; ) is officially an administrative area of the Principality of Monaco, specifically the ward of Monte Carlo/Spélugues, where the Monte Carlo Casino is ...
) # Parametric Modeling (empirically-based algorithm, usually derived through regression analysis, with varying degrees of judgment used). While all are valid methods, the method chosen should be consistent with the first principles of risk management in that the method must start with risk identification, and only then are the probable cost of those risks quantified. In best practice, the quantification will be probabilistic in nature (Monte-Carlo is a common method used for quantification). Typically, the method results in a distribution of possible cost outcomes for the project, product, or other investment. From this distribution, a cost value can be selected that has the desired probability of having a cost underrun or
cost overrun A cost overrun, also known as a cost increase or budget overrun, involves unexpected incurred costs. When these costs are in excess of budgeted amounts due to a value engineering underestimation of the actual cost during budgeting, they are known ...
. Usually a value is selected with equal chance of over or underrunning. The difference between the cost estimate without contingency, and the selected cost from the distribution is contingency. For more information, AACE International has catalogued many professional papers on this complex topic. Contingency is included in budgets as a control account. As risks occur on a project, and money is needed to pay for them, the contingency can be transferred to the appropriate accounts that need it. The transfer and its reason is recorded. In risk management, risks are continually reassessed during the course of a project, as are the needs for cost contingency.


See also

;Lists * Glossary of construction cost estimating *
Glossary of project management A glossary of terms relating to project management and consulting. A * Agile software development is a set of fundamental principles about how software should be developed based on an agile way of working in contrast to previous heavy-handed ...
;Related fields *
Construction bidding Construction bidding is the process of submitting a proposal ( tender) to undertake, or manage the undertaking of a construction project. The process starts with a cost estimate from blueprints and material take offs. The tender is treated as an o ...
*
Cost engineering Cost engineering is "the engineering practice devoted to the management of project cost, involving such activities as estimating, cost control, cost forecasting, investment appraisal and risk analysis". "Cost Engineers budget, plan and monitor inve ...
*
Industrial engineering Industrial engineering is an engineering profession that is concerned with the optimization of complex process (engineering), processes, systems, or organizations by developing, improving and implementing integrated systems of people, money, kno ...
*
Pre-construction services Pre-construction services are used in planning a construction project before the actual construction begins. These services are often referred to as preconstruction or precon. It is a modern practice, considered to be part of construction project m ...
*
Project management Project management is the process of leading the work of a team to achieve all project goals within the given constraints. This information is usually described in project documentation, created at the beginning of the development process. Th ...
* Total cost management ;Related topics *
Retentions in the British construction industry Retainage is a portion of the agreed upon contract price deliberately withheld until the work is substantially complete to assure that contractor or subcontractor will satisfy its obligations and complete a construction project. A retention is money ...
* Mobilization payment, an advance payment to a contractor at the start of a project to assist in the beginning of operations. ;Professional organizations *
AACE International AACE International (Association for the Advancement of Cost Engineering) was founded in 1956 by 59 cost estimators and cost engineers during the organizational meeting of the American Association of Cost Engineering at the University of New Hamps ...
*
American Society of Professional Estimators ASPE is the American Society of Professional Estimators. It was founded in 1956 by about 20 cost estimators in Los Angeles, California, USA. In 1974, there were 10 chapters totalling 600 members. By 1977, there were 23 chapters totalling 1500 memb ...
*
Project Management Institute The Project Management Institute (PMI, legally Project Management Institute, Inc.) is a U.S.-based not-for-profit professional organization for project management. Overview PMI serves more than five million professionals including over 680,00 ...
*
Royal Institution of Chartered Surveyors The Royal Institution of Chartered Surveyors (RICS) is a global professional body for surveyors, founded in London in 1868. It works at a cross-governmental level, and aims to promote and enforce the highest international standards in the val ...


References


External links


ACostE Association of Cost Engineers

ICEAA International Cost Estimating and Analysis Association
{{DEFAULTSORT:Cost Contingency Cost engineering