Project planning determines a project’s affordability and helps to better plan for it. Cost estimates are a commonly used way to plan for a project. The estimated cost of labor, materials, rent, and permits and other fees and expenses give a general perspective on how much the project will cost. However, projects are full of uncertainties that accurately estimating for a project is quite challenging. Under estimation is expected to occur due to uncertainties. To cater for the underestimation and to avoid cash strain during construction, project planners came up with contingency estimates.
Contingency Definitions
Contingency is generally defined as funds included in the cost estimates of a project to cover for unexpected risks. England & Moreci (2012), defines contingency as the estimated amount of money added to the base cost amount to cater for uncertainties
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The American Association of Cost Engineers adopted the definition of “specific provision for unforeseeable elements of cost within the defined project scope. [Contingency is] particularly important where previous experience relating estimates and actual costs has shown that unforeseeable events which will increase costs are likely to occur” (AACE, 2018).
The DOE on the other hand has adopted the definition “Covers costs that may result from incomplete design, unforeseen and unpredictable conditions, or uncertainties within the defined project scope. The amount of the contingency will depend on the status of design, procurement, and construction; and the complexity and uncertainties of the component parts of the project. Contingency is not to be used to avoid making an accurate assessment of expected cost” (DOE, 2018).
Therefore, contingency remains an important part of project estimation. Some estimators, however, decide to hide contingency estimates in the project estimates to avoid conflict with management or owner of the project. This is called buried contingency which is considered as dishonest and never encouraged.
Contingency budget is never an easy subject for planners. The project director always advocates for high estimates to make sure that incase of any eventuality, there is enough to fund it while the project owner will always advocate for a lower allocation to maintain project control. Therefore, there is no defined set contingency amount for any given project. It is the duty of the project director, project owner and planner to come up with an agreeable figure. Adequate allocation is, however, important to avoid need for approvals incase more funds are needed in the course of the project.
National Research Council (2005), mentions that when risk is seen as a probability by the project owners than it can help to guide the contingency estimation. Use of probability distribution can help give numerical values to the estimate. For instance, if the uncertainty assumes a probability distribution, contingency can be an amount of money added to the mean of the duration of the project. But if the project cost is a random variable then the project estimate may not have any relationship to the mean.
The use of probability may also bring accuracy as there is a huge amount of uncertainty in many projects. The typical assumption of +10% may be grossly inadequate or overly estimated. Owners never understand the risks involved especially in big projects. Engineers are also unable to specifically mention the risk because each project is unique. Therefore, project owner must be made to understand both behavioral and technical aspects of the risks. Concepts of risk, accuracy and contingency principles may be of great help for estimation.
As mentioned earlier, there are no accurate ways of estimating risks. AACE and DOE have guidelines on contingency estimates but ultimately each project estimate is unique to the expected risks. The provided guidelines are given out to assist project owners to have a general perspective of the estimate ranges.
The table below gives the estimates by DOE (DOE, 2018).
| Type of Estimate |
Overall Contingency Allowances % of Remaining Costs Not Incurred |
|
PLANNING (Prior to CDR) Standard Experimental/Special Conditions |
20% to 30% Up to 50% |
|
BUDGET (Based upon CDR) Standard Experimental/Special Conditions |
15% to 25% Up to 40% |
| TITLE I | 10% to 20% |
| TITLE II DESIGN | 5% to 15% |
| GOVERNMENT (BID CHECK) | 5% to 15% adjusted to suit market conditions |
| INDEPENDENT ESTIMATE |
To suit status of project and estimator's judgment |
There exits different methods used to calculate contingency estimate. Different experts have come up with different ways to come up with contingency estimates. Traditional percentage, range estimating, factor rating, Monte Carlo simulation, method of moments, fuzzy sets and many more (Baccarini, 2005). Traditional percentage is widely used because it is derived from experience and intuition. However, it is very difficult defend estimates from the traditional percentage.
Factors that determine contingency estimation
1 Project complexity
Complicated projects need more contingency allocation more than less complicated projects. The DOE has provided cost estimation codes depending on the complexity of projects. The estimates are as below (DOE, 2018).
Land and land rights 5%-10%
Improvements to standard equipment 10%-15%
New buildings and additions 15% to 20%
Engineering 15% to 25%
Building modifications 15% to 25%
Special facilities 20% to 30%
Special conditions Up to 50%
2. Design status
The details in a design also contribute to the amount of contingency estimate. The degree of detail in a design majorly informs the DOE contingency estimates as mentioned above. A whole project may also have different contingency estimates depending on the level of construction. For instance, a residential construction may be divided into different levels of construction with different contingency estimates. The foundation estimate may be 10% while the roofing estimate may be 5%.
3. Market conditions
Uncertain market conditions may push up contingency percentages. If the at the point of cost approximation, it is not clear how the market will affect the prices of materials and labor then the project estimates will have higher contingency allocation.
4. Risk factors
This is determined using project location, time of year, duration of the project and technicality. Risk is mostly determined through experience and intuition as it might not be easy to identify most risks.
In conclusion, contingency estimates are essential for every project. It is very difficult to estimate the exact estimate in each project yet contingency is important for satisfactory completion of projects. Without proper planning, engineers have to keep requesting for approvals and this can significantly impact on the project completion time.
References
National Research Council. (2005). The Owner's Role in Project Risk Management . National Academies Press.
AACE (2018). Escalation Estimating principles. https://web.aacei.org/search-results?indexCatalogue=main-search&searchQuery=Contingency+is+a+provision%2C+usually&wordsMode=0
DOE (2018). Contingency. Retrieved from https://www.directives.doe.gov/directives-documents/400-series/0430.1-EGuide-1-Chp11/@@images/file
Baccarini, D. (2005). Estimating project cost contingency-Beyond the 10% syndrome. In Australian Institute of Project Management National Conference . Australian Institute of Project Management.
