SARC Project Contingency Methodology

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C o m m e r c i a l - I n - C o n f i d e n c e
R e v A 5 - F i n a l
Project Contingency Methodology
The SARC methodology employed to produce the contingency recommendation is detailed within this brief. The primary
aims of the methodology include:
a. Validate the veracity of the base estimate. Given the progress made in development of front end engineering and
design (approx 20~25% of the total design effort) and the relatively low level of design / technology risk then it is
appropriate that the base estimate would fall within a probabilistic range close to P
[50]
; or in the event that it is
beneath a range of 45-55% then the significant events that cause this skewing are reasonable in terms of the risk
scope associated with the level of design knowledge.
b. Predict a defendable estimate of Direct Contingency for the design, construct and defect phases of the project.
This requires that the contingency model is based on definable events that are probable. Large impact but
improbable events are not included as these tend to unreasonably skew the model results and contingency for
such events (Supplementary Contingency) should be held and controlled by Client. Given that design is only at
FEED stage it is not reasonable to use a P[50] prediction for Direct Contingency; rather it is normal practice to use
a P
[60]
to P
[70]
value in this instance (usually dependent on the multi discipline nature of the project and the
inherent technology risks). In this instance a P
[60]
value is considered reasonable.
A1.1 Contingency Allowances
The Project's capex contingency allowance will comprise the following:
a. Direct Contingency Allowance; and
b. Supplementary Contingency Allowance.
It is normal practise to add this contingency allowance to the Base Estimate to form the approved Project Capex budget
(Contract LS value or Target Cost)
As such the Capex estimate will contain the following contingency type allowances:
a. Quantity Growth allowance - detailed with the Base Line Capex estimate. Growth (& design) allowance covers
the likely quantities of work that are poorly defined due to the lack of detailed engineering; and will predominantly
address bulk scope items such as concrete, steel & piping works.
These allowances will be added by each of the estimating parties. The percentage, quantity and $value of the
add ons are to be clearly identified by WBS area and discipline within that area.
b. Direct Contingency allowance - provides a contingency sum to address a range of known and probably risk
and opportunity events. This would normally include:
i. Scope, time and cost impacts associated with yet to be resolved technical risks.
ii. The normal range of productivity and unit cost risks present in the supply, fabrication and construction
markets.
iii. Escalation risk.
iv. Extra over time delay risk.
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v. Other project specific risks as identified in the ZG Project risk register (i.e. risks with a High (or greater)
ranking that have not been closed or have not had mitigation scope costed into the Baseline Capex
estimate). For example this category of risk event may include:
Wet Weather delay
Industrial disputation delays
Etc ...
The Direct Contingency does not allow for force majeur or other major emergency type events that are caused by
events outside the reasonable control of the Project Team and its contractors.
The Direct Contingency allowance is normally developed using established monte carlo simulation techniques.
c. Supplementary Contingency Allowance provides a contingency sum for predominantly unknown events,
particularly in context of a complex, large scale, multi -discipline project. This amount will bring the total budget up
to a predetermined cost probability outcome that is normally within the range of 80 to 90%. This predetermined
value is normally defined by the Project Owner. For example the following risk events are usually included in
Supplementary Contingency allowance:
i. Force majeur events
ii. Allowance for gross estimate errors;
iii. Changes in law or regulations; etc...
This element of the Project Budget is normally managed differently to the Baseline Estimate (and the direct
contingency) as it only applies to special / emergency events.
Figures A1.1.1 illustrates the composition and build up of the Project Contingency.
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Figure A1.1.1 Project Estimate Budget & Contingency Build Up
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A1.2 Identifying R&O to be modelled
The process to identify the risks and opportunities that are appropriate for inclusion into a contingency model is:
a. Identify and record all potential risk and opportunity events.
b. Identify and eliminate risks that are inherently procedural in nature or infer below industry standard
levels of competence. Having competent parties involved in the Project delivery should eliminate all
such risk and no contingency allowance should be required for incompetent or negligent events.
c. Remaining risk events are ranked in terms of likelihood, consequence and manageability. Where
possible risks assessed as having high impact (i.e. high likelihood x high consequence and are
manageable) are included with the reimbursable cost portions of the Base Estimate (i.e. a plan to
prevent the risk event occurring is priced into the Projects direct budget).
d. The remaining risks which have not been mitigated by scope within the reimbursable cost budget are
ranked in terms of likelihood, consequence and costed (i.e. with underlying quantity / scope definition).
Events that are probable are then used to model the contingency. Any predicted under / over run on the
projects critical path is also included so that risk on Project overheads and possible unplanned standing
costs are appropriately considered. These risks (and all reasonably probable opportunities events) form
the Projects commercial risk list.
A1.3 Monte Carlo Simulation
Two monte carlo simulations are performed:
a. Model #1 - is performed on the R&O commercial risk list. This simulation will predict a range of values
(i.e. P
[0]
to P
[100]
) and an appropriate value will be selected [i.e. P
[60]
]. This amount is the project's direct
contingency.
b. Model # 2 is performed on the estimate and the ranges within this model cater for normal productivity
and market costs issues. The selected range of direct contingency is included in this overall Project cost
model as it is expected (&certain) that a significant proportion of the direct contingency will be incurred.
The P
[60]
value from model # 1 is added to the CATS value in model # 2 to give the outcome probability P
[x]
for
the Projects direct cost (i.e. Base Estimate + R&O contingency under the contract definitions).
P
[x]
is then subject to a final review against recent experience and also un valued / un known risk events. This
may lead to a second recommended in relation to the need for a Supplementary Contingency to be held by
Owner / Client.
Figure A1.1.2 depicts the above process.
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Figure A1.1.2 - Modelling Process (From TSA Study)

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