Contingency Reserves - Revision history

Tkokotas at 13:04, 16 November 2018

2018-11-16T13:04:15Z

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			''Developed by Philip van Berkom''


	== Abstract ==		== Abstract ==

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	<references />		<references />
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			[[Category:Project Management]][[Category:Uncertaity]][[Category:Change Management]][[Category:Risk]]

PA at 18:53, 2 October 2017

2017-10-02T18:53:53Z

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	This journal includes an overview of contingency calculation methods in the construction industry. The methods aid in establishing a sense in which ones should be applied to certain projects at a specific project phase.		This journal includes an overview of contingency calculation methods in the construction industry. The methods aid in establishing a sense in which ones should be applied to certain projects at a specific project phase.

	*AACE International, [http://web.aacei.org/~~docs~~/~~default-source~~/~~toc/toc_18r~~-~~97.pdf?sfvrsn=4~~ "~~COST ESTIMATE CLASSIFICATION SYSTEM –~~
	~~AS APPLIED IN ENGINEERING, PROCUREMENT, AND CONSTRUCTION FOR THE PROCESS INDUSTRIES~~ "]. ~~''AACE® International Recommended Practice No. 42R-08'', March 2016.'~~		*AACE International, [http://web.aacei.org/resources/publications/recommended-practices "Recommended Practices"].
	Provides recommended guidelines for applying general principles of estimate ~~classification to~~ project ~~cost estimates~~.		Provides recommended guidelines for applying general principles of cost engineering. Includes estimate classifications, risk analysis frameworks, and other project controls disciplines.


	*Project Management Institute. "A guide to the project management body of knowledge (PMBOK® guide)". Fifth edition, 2013.		*Project Management Institute. "A guide to the project management body of knowledge (PMBOK® guide)". Fifth edition, 2013.

PA: /* Annotated bibliography */

2017-10-02T18:45:04Z

Annotated bibliography

← Older revision		Revision as of 18:45, 2 October 2017
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	This journal includes an overview of contingency calculation methods in the construction industry. The methods aid in establishing a sense in which ones should be applied to certain projects at a specific project phase.		This journal includes an overview of contingency calculation methods in the construction industry. The methods aid in establishing a sense in which ones should be applied to certain projects at a specific project phase.

	*AACE International, [http://web.aacei.org/docs/default-source/toc/toc_18r-97.pdf "COST ESTIMATE CLASSIFICATION SYSTEM –		*AACE International, [http://web.aacei.org/docs/default-source/toc/toc_18r-97.pdf?sfvrsn=4 "COST ESTIMATE CLASSIFICATION SYSTEM –
	AS APPLIED IN ENGINEERING, PROCUREMENT, AND CONSTRUCTION FOR THE PROCESS INDUSTRIES "]. ''AACE® International Recommended Practice No. 42R-08'', March 2016.'		AS APPLIED IN ENGINEERING, PROCUREMENT, AND CONSTRUCTION FOR THE PROCESS INDUSTRIES "]. ''AACE® International Recommended Practice No. 42R-08'', March 2016.'
	Provides recommended guidelines for applying general principles of estimate classification to project cost estimates.		Provides recommended guidelines for applying general principles of estimate classification to project cost estimates.

PA: /* Annotated bibliography */

2017-10-02T18:42:23Z

Annotated bibliography

← Older revision		Revision as of 18:42, 2 October 2017
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	This journal includes an overview of contingency calculation methods in the construction industry. The methods aid in establishing a sense in which ones should be applied to certain projects at a specific project phase.		This journal includes an overview of contingency calculation methods in the construction industry. The methods aid in establishing a sense in which ones should be applied to certain projects at a specific project phase.

	*AACE International, [http://web.aacei.org/docs/default-source/toc/~~toc_42r~~-08.pdf "~~RISK ANALYSIS~~ AND ~~CONTINGENCY DETERMINATION USING PARAMETRIC ESTIMATING~~"]. ''AACE® International Recommended Practice No. 42R-08'', ~~May 2011~~.'		*AACE International, [http://web.aacei.org/docs/default-source/toc/toc_18r-97.pdf "COST ESTIMATE CLASSIFICATION SYSTEM –
			AS APPLIED IN ENGINEERING, PROCUREMENT, AND CONSTRUCTION FOR THE PROCESS INDUSTRIES "]. ''AACE® International Recommended Practice No. 42R-08'', March 2016.'
	Provides recommended guidelines for applying general principles of estimate classification to project cost estimates.		Provides recommended guidelines for applying general principles of estimate classification to project cost estimates.


	*Project Management Institute. "A guide to the project management body of knowledge (PMBOK® guide)". Fifth edition, 2013.		*Project Management Institute. "A guide to the project management body of knowledge (PMBOK® guide)". Fifth edition, 2013.
	This book ~~represents~~ the holy bible of projects management theory, concepts, and terminology. This handbook will guide every project, program, or portfolio manager throughout his or her entire career.		This book can be seen as the holy bible for projects management theory, concepts, and terminology. This handbook will guide every project, program, or portfolio manager throughout his or her entire career.

	==References==		==References==

PA: /* Reflection on Methods */

2017-10-02T18:39:31Z

Reflection on Methods

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	{\|style="margin: 0 auto;"		{\|style="margin: 0 auto;"
	\|[[File:Ref2.PNG \|80\|frame\|right\| Figure 6: CPI comparison among the four different methods, adapted from Exploring Techniques for Contingency Setting <ref name=bur />]]		\|[[File:Ref2.PNG \|30\|frame\|right\| Figure 6: CPI comparison among the four different methods, adapted from Exploring Techniques for Contingency Setting <ref name=bur />]]
	\|[[File:Ref3.PNG \|80\|frame\|right\| Figure 7: CPI performance among the four different methods compared between poorly-defined and well-defined projects, adapted from Exploring Techniques for Contingency Setting <ref name=bur />]]		\|[[File:Ref3.PNG \|30\|frame\|right\| Figure 7: CPI performance among the four different methods compared between poorly-defined and well-defined projects, adapted from Exploring Techniques for Contingency Setting <ref name=bur />]]
	\|}		\|}

PA: /* Reflection on Methods */

2017-10-02T18:38:34Z

Reflection on Methods

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	It is evident that many different methods exist to assess project risk and calculate cost contingency reserves, and new methods keep on appearing in the industry. An AACE published journal by Burroughs and Juntima in 2004, investigated the performance of contingency estimating among some common methods over a time period of 10 years. The Contingency Performance Indicator (CPI) was used as a measure to quantitatively evaluate the accuracy of the project’s contingency and is defined by the difference between the percent contingency used and contingency estimated <ref name=bur>Burroughs, S.E, Juntima, G., [http://www.costandvalue.org/download/?id=1710 "Exploring Techniques for Contingency Setting"], ''AACE International Transactions'', 2004. Retrieved on September 28 </ref>. One of the surprising results of their study shows that the CPI has actually worsened over time as displayed in Figure 5.		It is evident that many different methods exist to assess project risk and calculate cost contingency reserves, and new methods keep on appearing in the industry. An AACE published journal by Burroughs and Juntima in 2004, investigated the performance of contingency estimating among some common methods over a time period of 10 years. The Contingency Performance Indicator (CPI) was used as a measure to quantitatively evaluate the accuracy of the project’s contingency and is defined by the difference between the percent contingency used and contingency estimated <ref name=bur>Burroughs, S.E, Juntima, G., [http://www.costandvalue.org/download/?id=1710 "Exploring Techniques for Contingency Setting"], ''AACE International Transactions'', 2004. Retrieved on September 28 </ref>. One of the surprising results of their study shows that the CPI has actually worsened over time as displayed in Figure 5.

	[[File:Ref1.PNG\|thumb\|center\|~~x350px~~\|alt=Methods\|Figure 5: Contingency Performance Index between 1994-2003, adapted from Exploring Techniques for Contingency Setting <ref name=bur />]]		[[File:Ref1.PNG\|thumb\|center\|x290px\|alt=Methods\|Figure 5: Contingency Performance Index between 1994-2003, adapted from Exploring Techniques for Contingency Setting <ref name=bur />]]

	This was driven by a dramatic increase of smaller projects. The CPI of large projects has been quite constant throughout the studied period. This finding was especially surprising due to the fact of the increasing number of projects adopting more sophisticated methods.		This was driven by a dramatic increase of smaller projects. The CPI of large projects has been quite constant throughout the studied period. This finding was especially surprising due to the fact of the increasing number of projects adopting more sophisticated methods.
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	{\|style="margin: 0 auto;"		{\|style="margin: 0 auto;"
	\|[[File:Ref2.PNG \|~~125~~\|frame\|right\| Figure 6: CPI comparison among the four different methods, adapted from Exploring Techniques for Contingency Setting <ref name=bur />]]		\|[[File:Ref2.PNG \|80\|frame\|right\| Figure 6: CPI comparison among the four different methods, adapted from Exploring Techniques for Contingency Setting <ref name=bur />]]
	\|[[File:Ref3.PNG \|~~110~~\|frame\|right\| Figure 7: CPI performance among the four different methods compared between poorly-defined and well-defined projects, adapted from Exploring Techniques for Contingency Setting <ref name=bur />]]		\|[[File:Ref3.PNG \|80\|frame\|right\| Figure 7: CPI performance among the four different methods compared between poorly-defined and well-defined projects, adapted from Exploring Techniques for Contingency Setting <ref name=bur />]]
	\|}		\|}

PA at 18:37, 2 October 2017

2017-10-02T18:37:44Z

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	Two types of reserves exist on a capital project: cost contingency reserve and management reserve <ref name=PMI>England, K. & Moreci, J. [https://www.pmi.org/learning/library/contingency-are-covered-6099 "Contingency - Are you Covered?"], ''PMI®'', Vancouver, 2012. Retrieved on 15 September 2017.</ref>. Cost contingency reserve is referred to an amount added to the project’s base estimate to cover for known-unknowns. Cost contingency reserve does not cover any major scope changes, nor escalation or extraordinary events. Management reserve (sometimes referred as management contingency) covers the unknown-unknowns of the project, and is not included in the base estimate, meaning that the project manager or project controller is only permitted to use this reserve if the organizational management approves, unlike contingency reserves which is usually expended. The purpose of allocating contingency to the base estimate is essentially a form of mitigating risk that accounts for such uncertainties. This article explains the purpose of contingency reserves, some of its calculation methods and concludes a discussion on contingency reserves.		Two types of reserves exist on a capital project: cost contingency reserve and management reserve <ref name=PMI>England, K. & Moreci, J. [https://www.pmi.org/learning/library/contingency-are-covered-6099 "Contingency - Are you Covered?"], ''PMI®'', Vancouver, 2012. Retrieved on 15 September 2017.</ref>. Cost contingency reserve is referred to an amount added to the project’s base estimate to cover for known-unknowns. Cost contingency reserve does not cover any major scope changes, nor escalation or extraordinary events. Management reserve (sometimes referred as management contingency) covers the unknown-unknowns of the project, and is not included in the base estimate, meaning that the project manager or project controller is only permitted to use this reserve if the organizational management approves, unlike contingency reserves which is usually expended. The purpose of allocating contingency to the base estimate is essentially a form of mitigating risk that accounts for such uncertainties. This article explains the purpose of contingency reserves, some of its calculation methods and concludes a discussion on contingency reserves.


	== Motivation ==		== Motivation ==
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	A diagrammatic representation where identified risks are systematically coupled with the possible outcomes, using statistical techniques. Each individual risk is associated with a conditional expected value impact and probability of occurrence. After identifying all the risks the “best” path, with the highest result, should be the appropriate choice for the contingency amount. Note that the probability tree method can become increasingly extensive and impractical to use when dealing with large projects consisting of many layers of risks<ref name= UF />.		A diagrammatic representation where identified risks are systematically coupled with the possible outcomes, using statistical techniques. Each individual risk is associated with a conditional expected value impact and probability of occurrence. After identifying all the risks the “best” path, with the highest result, should be the appropriate choice for the contingency amount. Note that the probability tree method can become increasingly extensive and impractical to use when dealing with large projects consisting of many layers of risks<ref name= UF />.

	[[File:Tree.PNG\|thumb\|right \|~~x280px~~\|alt=Methods\|Figure 3: Example of probability tree , adapted from PM Study Circle <ref name= UF />]]		[[File:Tree.PNG\|thumb\|right \|x220px\|alt=Methods\|Figure 3: Example of probability tree , adapted from PM Study Circle <ref name= UF />]]

	===== First Order Second Method =====		===== First Order Second Method =====
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	*''Most likely = 13K = m''		*''Most likely = 13K = m''

	*''Pessimistic = 25K = c''		*''Pessimistic = 25K = b''

	The mean, based on beta statistical distribution, is calculated as follows:		The mean, based on beta statistical distribution, is calculated as follows:

PA: /* Annotated bibliography */

2017-10-02T15:13:24Z

Annotated bibliography

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	*Project Management Institute. "A guide to the project management body of knowledge (PMBOK® guide)". Fifth edition, 2013.		*Project Management Institute. "A guide to the project management body of knowledge (PMBOK® guide)". Fifth edition, 2013.
	This book represents the holy bible of projects management theory, concepts, and terminology. This handbook will guide every project, program, or portfolio manager throughout his or her entire career.		This book represents the holy bible of projects management theory, concepts, and terminology. This handbook will guide every project, program, or portfolio manager throughout his or her entire career.



	*

	==References==		==References==

PA at 15:13, 2 October 2017

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	*P. Bakhshi, A. Touran, [http://www.sciencedirect.com/science/article/pii/S1877705814018943 "An Overview of Budget Contingency Calculation Methods in Construction Industry".] ''Procedia Engineering'', 85, 52–60, Boston, 2014.		*P. Bakhshi, A. Touran, [http://www.sciencedirect.com/science/article/pii/S1877705814018943 "An Overview of Budget Contingency Calculation Methods in Construction Industry".] ''Procedia Engineering'', 85, 52–60, Boston, 2014.
			This journal includes an overview of contingency calculation methods in the construction industry. The methods aid in establishing a sense in which ones should be applied to certain projects at a specific project phase.

			*AACE International, [http://web.aacei.org/docs/default-source/toc/toc_42r-08.pdf "RISK ANALYSIS AND CONTINGENCY DETERMINATION USING PARAMETRIC ESTIMATING"]. ''AACE® International Recommended Practice No. 42R-08'', May 2011.'
			Provides recommended guidelines for applying general principles of estimate classification to project cost estimates.


			*Project Management Institute. "A guide to the project management body of knowledge (PMBOK® guide)". Fifth edition, 2013.
			This book represents the holy bible of projects management theory, concepts, and terminology. This handbook will guide every project, program, or portfolio manager throughout his or her entire career.


	This journal includes an overview of contingency calculation methods in the construction industry. The methods aid in establishing a sense in which ones should be applied to certain projects at a specific project phase.

	*		*

PA at 15:05, 2 October 2017

2017-10-02T15:05:39Z

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	== Annotated bibliography ==		== Annotated bibliography ==

	* ~~Payam~~ Bakhshi ~~and Ali~~ Touran		*P. Bakhshi, A. Touran, [http://www.sciencedirect.com/science/article/pii/S1877705814018943 "An Overview of Budget Contingency Calculation Methods in Construction Industry".] ''Procedia Engineering'', 85, 52–60, Boston, 2014.

			This journal includes an overview of contingency calculation methods in the construction industry. The methods aid in establishing a sense in which ones should be applied to certain projects at a specific project phase.

			*

	==References==		==References==