Identification of Risk and Quantification of Allocation to Contingency Reserves

Abstract

Construction projects play a major role in the development of infrastructure in emerging nations. It has been observed that the majority of infrastructure projects have low return on investment because they fail to meet their schedule and money goals. Depending on the type, size, and complexity of the project, each risk's amount and importance may change. Due to the various risks they face, many projects fall short of their goals. Most projects use the normal percentages, usually between 5 and 10%, to calculate the contingency reserve. Large projects are now better served by using a probabilistic approach, where hazards are represented as probability distribution functions (PDFs) as opposed to static numbers. The evolution of desktop computing capability over the last 20 years has brought about this change. The goal of this approach is to gain a deeper understanding of project uncertainty in order to lay the groundwork for risk management solutions.
This research explores the potential applications of probabilistic approaches to develop a "right-sized" contingency model that combines an explicit assessment of the risks facing a project with the size of the contingency reserve.