Supply Chain Contingency Estimation: Calculation Methods Towards Better Management of Risk and Cost-Overrun

Abstract

Contingency estimation methods are largely misapplied in the construction industry and currently align inadequately with risk and cost-overrun. The work discussed here addresses this gap, to present a newly developed structured mechanism to help the project-team choose an appropriate calculation method based upon project type, supply chain, and (on & off) site complexities to minimise cost overrun. Three contingency estimation methods, namely: deterministic methods; probabilistic methods; and, modern mathematical methods are reviewed, then, using a mixed-methods research approach that includes qualitative semi-structured interviews with key Western-Australian industry experts to build necessarily upon relevant secondary research, the work presents a means to select a best estimation method, depending on the project’s (on or off) site circumstances. This work clarifies that deterministic methods can be used for simple, repetitive and low complex projects and supply chains - suitable contingency percentages can be applied from past, similar project risk factors and complexities; it is determined here that this estimation method provides a simple and quick decision-making tool to determine the project contingency. On the other hand, complex and large-scale projects, typically with a multitude of uncertainties and risks, are apt to incur additional costs and delay the project; thus, the project team can be guided towards individual risk events, calculate the consequences in terms of cost and time, and finally define risk mitigation strategies. A structured mechanism is presented that allows precedential experience, (on or off) site conditions, internal and external factors, and key risk events’ identification, to guide choice of the most appropriate, contingency estimation analyses method for a project at hand.