“Success" in megaproject management is typically defined as projects being delivered on budget, time, and benefits. “A project is considered a failure when it has not delivered what was required, in line with expectations. Therefore, in order to succeed, a project must deliver to cost, to quality, and on time; and it must deliver the benefits presented in the business case”.
If an original cost estimate is questionable and deceptive, the estimated Total Installed Cost (TIC) won’t be reliable regardless how rigorous the quantitative risk analysis process is for the contingency.
Determining Contingencies for capital projects is an art and also the science; it is a professional act practiced by experienced and competent Quantitative Risk Specialist with @RISK tool. With the knowledge of Quantified Risks, a Project Manager can make much wiser decisions based on “calculated risks”, not guesswork anymore.
For QRA process of conducting a sophisticated cost estimate risk analysis, the following key steps must be followed, including setting up RISCOR simulation model in advance.
- Review Schedule & Estimate and Set up Risk Breakdown Structure (RBS)
- Facilitate and perform Schedule Risk Analysis (Level 2 or 3 schedule)
- Identify the critical “Specific Risks” from cost estimate elements per RBS
- Facilitate Brainstorming Workshop to estimate Risk Ranges (P10 & P90)
- Facilitate Brainstorming Session to identify and estimate “Systemic Risks”
- Populate projected Cash-flow & apply annual risked escalation rates
- Integrate all risky elements in the Riscor Model (@RISK) and run simulation
- Interpret the results and compare to Benchmarks then produce final report
Adding more contingency to your base estimate
- does NOT make the cost estimate more accurate BUT
- does increase the confidence level of under-running budget AND
- jeopardizes project economic returns (ROI) / chances of winning bids