**Problem Definition.**

Due to increase in produce water forecast from 50,000 ppd to 150,000 ppd the water treatment system required to be upgraded to handle the new additional demand. The cost estimation of the Project has been developed. From previous experience for similar project, the chance of variations is most likely to happen. Therefore, the approved cost may overrun. Then as recommended practice it is required to perform cost contingency for the project. Contingency is defined 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”

**Identify the Feasible Alternative.**

From recommended practice there are four methods to cost and time contingency for such project:

- Expert Judgment.
- Predetermined Guidelines.
- Simulation Analysis.
- Range Estimation.
- Expected Value.

- Parametric Modeling.

In this project simulation analysis method is used to cost contingency estimation. Simulation analysis can be performed using two methods: range estimation and expected value. In this blog range estimation is used.

Range estimating is a risk analysis technology that combines Monte Carlo sampling, a focus on the few critical items, and heuristics (rules of thumb) to rank critical risks and opportunities. This approach is used to establish the range of the total project estimate and to define how contingency should be allocated .

**Development of the Outcome for Alternative.**

To determine the cost contingency using range estimating it is required to:

Determines of ranges for each cost items.

- Determines the probability that each item can be completed within the estimate.
- Running Monte Carlo simulation for the cost range.
- Determines of critical items based on result of Monte Carlo simulation.
- Determine of contingency with reference to critical items only.

The below table summarize base estimation for the project cost items against each base cost estimate.

**Table 1 Project Base Estimation**

Based on market range value and historical information the low and high cost values are presented against cost item. The probability to overrun is 60 as project charter assumed.

**Table 2 Range and Desired Probability of Cost Items**

Then running Monte Carlo simulation, the results shown on table 3

**T****able 3 Result of Monte Carlo Simulation**

**Selection of Criteria.**

Refer to AACE International Recommended Practice No. 40R-08 and Recommended Practice No. 41R-08. The critical items are identified by using the following criteria.

**Table 4 Criteria for Determine of Critical Items **

**Analysis and Comparison of the Alternative.**

From Table 4 the conceptual estimates (AACE Classes 3,4,5) critical items were determined.

**T****able 5 Determines of Critical Items**

**Selection of the Preferred Alternative.**

The last step is to determine the cost contingency, as shown in table 6.

**Table 6 Determine of Cost Contingency**

**Performance Monitoring and the Post Evaluation of Result.**

During project executing it is recommended to monitor actual spending cost against estimated cost and cost contingency not to exceed 390,800 USD.

** References:**

- AACE International. (2008). Recommended Practice No. 40R-08,
*Contingency Estimating – General Principles*, page 3 – 4, AACE International. Morgantown, WV. - AACE International. (2008). Recommended Practice No. 41R-08,
*Risk Analysis and Contingency Determination Using Range Estimating*, page 1, AACE International. Morgantown, WV. - Wain Y.A. (2014).
*W20_Contingency Estimation in Storage Tank Project*. Retrieved fromhttp://kristalaace2014.wordpress.com/2014/07/07/w20_yaw_contingency-estimation-in-storage-tank-project/#more-1988

Pingback: W5.0_ Ahmed Al Azizi_Contingency Estimation in Skim Tank Project Using Expected Value Analysis | PMI-Oman 2014

i LOVE your case study, Ahmed!!! Great job….. My only question/challenge is why only P60? Is a 10% contingency really sufficient?

What you want to do is compare similar projects and divide the AFE (approved budget) into the “as built” or final budget and that will tell you historically what your contingency SHOULD be…….. I don’t know about Oman but here in most of SE Asia, we are looking at anywhere between 30% (P80) to 40% (P90) and that is over the historic mean.

You may also find this article interesting coming to us from Glenn Butts, NASA- http://www.build-project-management-competency.com/wp-content/uploads/2010/09/Glenn.Butts-Mega-Projects-Estimates.pdf. His “Joint Confidence Level” model has proven to be very helpful in getting NASA cost estimates to be closer to reality.

Bottom line- great case study and if you can access the data, I am always curious to find out what the REAL growth is, by comparing the original AFE to the As Built costs.

Keep up the good work!!

BR,

Dr. PDG, Jakarta

At First, thanks for the impressive Illustration of Contingency estimation using Range estimating. I saw a Similar working in other website and Understood the whole process.

However in this website, for Sr. No.5, I Could nOt understand How Cost Delta is Arrived at??

Request to provide Formula.

Regards,

Santosh Kulkarni