Intuitive and Usable Risk-Based Cost Contingency Estimation Model for General Contracting Firms

Construction projects inherently possess uncertainties, which represent risks and opportunities to contracting business entities. Their business success, therefore, is largely defined by how these uncertainties are managed from the planning and estimating to execution phases. Traditionally risks, in particular, have been dealt by converting them into the form of a contingency. Ironically, however, cost estimators have relied on deterministic ways of predicting project cost by producing point estimates. Moreover, contingencies have been typically determined as a percentage of the project cost. This practice is not enough to assess the impact of the project uncertainties. To remedy this situation, researchers have developed various analytical models, aiming at improving contingency estimation. These tools, however, have not been embraced as much by contracting firms mainly because they generally do not have expertise of the formal modeling techniques required to use these complex models. From this perspective, this paper proposes a cost contingency estimation model implemented as an add-in to Excel, the most common spreadsheet platform, which can be easily adoptable by contracting firms without special training required. This model uses a well-defined project risk management process and Monte Carlo simulation as its engine to model uncertainties and a project risk register. This paper focuses on the model’s contribution of separating complex analytical aspects from its input and output processes to emphasize the following reality - Contracting firms, after all, need an intuitive and yet flexible contingency estimating model, which should help them focus on extracting their experience and expertise in adequately determining contingency.