**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 expected value is used.

**Development of the Outcome for Alternative.**

** Expected value = probability of risk occurring x impact if occur **

To determine the cost contingency using expected value it is required to:

- Identify the Project specific risk.
- Estimating the probability of occurrence and the impact if the risk occurs.
- Screening the risk (to eliminate uncritical risk).
- Determining range for probability and impact for each of critical items.
- Estimating cost risk for each of critical items, and conduct Monte Carlo simulation.
- Determining cost contingency base on management desire probability overrun for each critical items.

In the below table summary of base estimate cost for each cost items:

**Table 1 Project Base Estimation**

The project risk analysis and management is a process which enables the analysis and management of the risks associated with a project. Properly undertaken it will increase the like hood of successful completion of a project to cost, time and performance objectives. The impact residual risks presented with probability against project cost item.

**Table 2 Probabilities – Impact of Residual Risk to the Project and Expected Value for Cost Items**

**Selection of Criteria.**

Refer to AACE International Recommended Practice No. 40R-08 and Recommended Practice No. 41R-08. The expected value method analyzes only the critical cost items using the below criteria:

**Table 3 Criteria for Determine of Critical Items **

**Analysis and Comparison of the Alternative.**

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**Table 4 Determines of Critical Items**

From the above the critical item the below Table 5show the range of probability and impact for critical items.

**Table 5 Range of Probability and Impact for Critical Items.**

Appling using triangular distribution function to obtain estimated cost risk for each critical item the results presented on below table.

**Table 6 Estimated Cost Risk**

**Selection of the Preferred Alternative.**

Finally to determine the cost contingency the Monte Carlo simulation is used, as shown in table 6.

**Table 7 Determine of Cost Contingency**

From both range estimation and expected value methods the contingency cost to be used is the average +15% as per project charter.

**Table 8 the Project 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 **600,900 USD.**

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**References:**

- Al Azizi Ahmed (2014) W4.0_
*Contingency Estimation in Additional Skim Tank Project Using Range Estimation Analysis*. Retrieved from https://pmioman14.wordpress.com/2014/07/27/w4-0_-ahmed-al-azizi_contingency-estimation-in-additional-skim-tank-project-using-range-estimation-analysis/ - Wain Y.A. (2014).
*W20_Contingency Estimation in Storage Tank Project*. Retrieved from

- AACE International. (2008). Recommended Practice No. 40R-08,
*Contingency Estimating – General Principles*, page 3 – 4, AACE International. Morgantown, WV. - AACE International. (2012). Recommended Practice No. 44R-08,
*Risk Analysis and Contingency Determination Using Expected Value*, page 1, AACE International. Morgantown, WV.

Hi Ahmed,

Great job but I lost you on Table 8……. If your expected value (P50) is 390.8 and your range estimate was 610.7 (assuming on the upper end of the range) then wouldn’t your contingency be the difference between P50 and whatever P value 610.7 is = 219.9?

I think your calculations are correct but maybe how you explained it is what doesn’t make sense?

Bottom line, CONTINGENCY is always the difference between P50 and whatever P level management has set, which is normally no LESS than P75 and more often, P85 or P90. (And the higher you go in the organization I tend to find the less risk averse management is, especially when it is their butts on the line and not just yours!!)

BR,

Dr. PDG, Jakarta