Risk analysis in cost planning and its effect on efficiency in capital cost budgeting

Abstract

Builds on earlier work which reported on the experience of the Hong Kong Government in using risk analysis techniques in capital cost estimating. In 1993 the Hong Kong Government implemented a methodology for capital cost estimating using risk analysis (ERA) in its public works planning. This calculated amount replaces the pre‐1993 contingency allowance, which was merely a percentage addition on top of the base estimate of a project. Adopts a team approach to identify, classify and cost the uncertainties associated with a project. The sum of the average risk allowance for the identified risk events thus becomes the contingency. A study of the effect of ERA was carried out to compare the variability and consistency of the contingency estimates between non‐ERA and ERA projects. The preliminary results of a survey showed a highly significant difference in variation and consistency between these groups. This analysis indicates the successful use of the ERA method for public works projects to reduce unnecessary and exaggerated allowance for risk. However, the contingency allowance for ERA projects was also considered high. Adds data from the UK with descriptions of 41 private sector projects which fall into the non‐ERA category and reflect better performance in the determining of contingency allowances.

Citation

Picken, D.H. and Mak, S. (2001), "Risk analysis in cost planning and its effect on efficiency in capital cost budgeting", Logistics Information Management, Vol. 14 No. 5/6, pp. 318-329. https://doi.org/10.1108/EUM0000000006244