Risk Evaluation Risk Evaluation CommitteeCommittee

CONTINGENCY, RISK & OTHER ALLOWANCES

Presentation By: Adam MalkhassianPresentation By: Adam Malkhassian

OctoberOctober 200 20033

Risk Evaluation Risk Evaluation CommitteeCommitteeSlide Slide 22

Why do we need allowances anyway ?Why do we need allowances anyway ?

• Not enough technical info.Not enough technical info.• Not enough commercial info.Not enough commercial info.• Ignorance of factsIgnorance of facts

ScopeScope CountryCountry TaxationTaxation LegalLegal

• No timeNo time• No budgetNo budget• No manpowerNo manpower

• Fear / Panic / confusionFear / Panic / confusion

Risk Evaluation Risk Evaluation CommitteeCommitteeSlide Slide 33

CONTINGENCY

An allowance to cover undefined items of work which An allowance to cover undefined items of work which

will have to be performed or elements of cost which will have to be performed or elements of cost which

will be incurred within the defined scope of work of will be incurred within the defined scope of work of

the estimate, that cannot be explicitly foreseen or the estimate, that cannot be explicitly foreseen or

described at the time the estimate is being made described at the time the estimate is being made

because of lack of complete accurate and detailed because of lack of complete accurate and detailed

information.information.

Risk Evaluation Risk Evaluation CommitteeCommitteeSlide Slide 44

CONTINGENCYCONTINGENCY

Contingency reflects the measure of the level of Contingency reflects the measure of the level of

uncertainties related to an established scope of work. It is uncertainties related to an established scope of work. It is

an integral part of an estimate and should be applied (after an integral part of an estimate and should be applied (after

careful analysis) to all parts of the estimates, i.e. direct careful analysis) to all parts of the estimates, i.e. direct

costs, indirect costs, services costs, etc.costs, indirect costs, services costs, etc.

Any defined item (no matter how preliminary the Any defined item (no matter how preliminary the

information, data or design) should be covered by specific information, data or design) should be covered by specific

allowance and not by contingency.allowance and not by contingency.

Risk Evaluation Risk Evaluation CommitteeCommitteeSlide Slide 55

CONTINGENCYCONTINGENCY

• Known unknowns Known unknowns

• If we had enough data, enough time, enough If we had enough data, enough time, enough manpower, we would have zero contingency.manpower, we would have zero contingency.

• Contingency is the sum of all contingencies added to Contingency is the sum of all contingencies added to each section of the work.each section of the work.

• Analysis by section/ WBS, system, etc.Analysis by section/ WBS, system, etc.

• Contingency is supposed to be used up 100% for the Contingency is supposed to be used up 100% for the purposes it was intended for.purposes it was intended for.

• Under the control of the project managementUnder the control of the project management

Risk Evaluation Risk Evaluation CommitteeCommitteeSlide Slide 66

Design Development AllowanceDesign Development Allowance An allowance to cover the cost of changes in design and An allowance to cover the cost of changes in design and

design methods not attributable to any other basic cause design methods not attributable to any other basic cause such as changes in output capacity of plant, changes in such as changes in output capacity of plant, changes in the originally defined scope of work, etc. It does not cover the originally defined scope of work, etc. It does not cover development of technology and normal evolution of development of technology and normal evolution of design as well as improvements to design due to feedback design as well as improvements to design due to feedback from operation of other similar plants.from operation of other similar plants.

Established and proven technology should carry very Established and proven technology should carry very little, if any, such allowance. Untested or relatively new little, if any, such allowance. Untested or relatively new technology should carry higher design development technology should carry higher design development allowanceallowance..

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COST ESCALATION

Cost escalation is the provision in actual or Cost escalation is the provision in actual or

estimated costs for an increase in the cost of estimated costs for an increase in the cost of

equipment, material, labour, etc., over that of the equipment, material, labour, etc., over that of the

estimate date, due to continuing price level changes estimate date, due to continuing price level changes

during the duration of the project.during the duration of the project.

Risk Evaluation Risk Evaluation CommitteeCommitteeSlide Slide 88

RISK ANALYSIS

Risk analysis is carried out to show the level of Risk analysis is carried out to show the level of

probability that a certain estimate will not overrun the probability that a certain estimate will not overrun the

projected amount. Based on the risk avalysis, a projected amount. Based on the risk avalysis, a

certain allowance will be added or deleted from the certain allowance will be added or deleted from the

overall estimate cost to achieve a certain level of overall estimate cost to achieve a certain level of

confidence. Acceptable levels of confidence and confidence. Acceptable levels of confidence and

probability rates are established by the SNC-Lavalin probability rates are established by the SNC-Lavalin

Corporate Management.Corporate Management.

Risk Evaluation Risk Evaluation CommitteeCommitteeSlide Slide 99

RISK ANALYSISRISK ANALYSIS

• Threats and opportunitiesThreats and opportunities

• Reasonable unknown unknownsReasonable unknown unknowns

• Reasonable and unreasonable riskReasonable and unreasonable risk

• Real risk versus ignorance of factsReal risk versus ignorance of facts

• Amount of risk is based on Monte Carlo simulationAmount of risk is based on Monte Carlo simulation

• May or may not be used during the projectMay or may not be used during the project

• Proactive risk management and mitigation essentialProactive risk management and mitigation essential

• Not all risks are managed or mitigatedNot all risks are managed or mitigated

• Management & mitigation of risk is not free.Management & mitigation of risk is not free.

• Nothing or all of risk allowance may be usedNothing or all of risk allowance may be used

Risk Evaluation Risk Evaluation CommitteeCommitteeSlide Slide 1010

PROJECT RESERVE

This category of provision covers elements of cost outside This category of provision covers elements of cost outside the defined scope of work. Usually, project reserve is the defined scope of work. Usually, project reserve is determined by the Client who carries it over and above the determined by the Client who carries it over and above the budget provided by the project management for the budget provided by the project management for the project execution, and is necessary for his financial project execution, and is necessary for his financial arrangements.arrangements.

This type of provision cannot be « factually » estimated. This type of provision cannot be « factually » estimated. If required by the Client, the project manager and the If required by the Client, the project manager and the project estimator may have to assist the Client to establish project estimator may have to assist the Client to establish such an allowance as a result of a separate analysis.such an allowance as a result of a separate analysis.