23506

2023 AACE® INTERNATIONAL TECHNICAL PAPER
OWN-4166
Project Contingency Forecasting–

Owner’s Perspective
Rajmohan Mishra
Abstract–Project execution and management in today’s world is vastly different from a few years ago. The traditional
approach to project development, estimating and submission for approval of final investment has transformed into
business mandated delivery windows and other constraints that make project execution more critical and sensitive
to cost and schedule impacts. Various aspects of project management such as contracting strategy, early EPC
involvement, design completion incentives, witness points for procurement to ensure quality, oversees sourcing of
critical material etc. have seen significant improvements to ensure project execution success.
However, one of significant requirements from an owner’s perspective is the predictability of the end, which greatly
relies of project risk management and contingency management. This paper addresses some of the issues in project
contingency management and provides solutions and insight for owner organizations to revisit the strategy and
ensure contingency management is effective and brings predictability to project end results (cost and schedule).
OWN-4166.1
Copyright © AACE® International.
This paper may not be reproduced or republished without expressed written consent from AACE® International
Table of Contents
Abstract .........................................................................................................................................................................1
Introduction ...................................................................................................................................................................3
Overview ........................................................................................................................................................................3
Risk Controls ..................................................................................................................................................................3
First Level Risk Control ........................................................................................................................................... 4
Second Level Risk Control....................................................................................................................................... 4
Contingency Management Process ...............................................................................................................................5
Contingency Drawdown Plan ................................................................................................................................. 6
Contingency Drawdown Forecast........................................................................................................................... 9
Contingency Drawdown Cashflow.......................................................................................................................... 9
Conclusion .....................................................................................................................................................................9
References ...................................................................................................................................................................10
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Introduction
Risk is defined as the probability that an unfavorable outcome will occur. Similarly, opportunity is defined as the
probability that a favorable outcome will occur [1, p2]. This paper discusses the potential gap between risk
realization or mitigation at the time of project funding approval and the actual management of contingency the
project execution. Much research has been conducted and focused on the risk management and methods to
compute the required contingency for a project to mitigate the residual risk. Please refer to the probabilistic risk
management document for further details [1]. This paper introduces concept of risk controls for effective risk
management not only controlling the overall risk management profile, also diminishing the likelihood and impact of
project risks.
This paper also introduces contingency management strategy to improve predictability of final forecast for cost and
schedule ahead of time. This will eliminate surprises to upper management and lead to significant potential savings.
This paper provides an overview of risk mitigation strategies and provides a deep dive into the process of contingency
management through the life cycle of the project.
Overview
Uncertainty is defined as a possible set of outcomes which may be favorable or unfavorable. Risk is related to the
unfavorable outcomes and opportunity is related to the favorable outcomes. For this standard uncertainty is termed
as risk which includes both threats and opportunities [1, p2].
Risk management is defined as the process of identification, prioritization of risks followed by coordinated
application of controls and identification of control owners to optimize the probability and impact of risks which is
to minimize the impact of threats and maximize the impact of opportunities.
Risks are categorized as the following based on the knowledge of likelihood and impact of the situations or conditions
[1,p2].
• Known–Known – These are the most common risks to be found in any project. These risks are typically
those which must be explicitly or implicitly accounted for in the estimate. In general, they involve a
continuous range of outcome, have a relatively high frequency and are individually of relatively low severity
(at least not catastrophic).
• Known–Unknown – These conditions (known-unknowns) which include risk exposure that are neither
explicit nor normally expected but are foreseeable and possible. In general, they tend to be discrete events,
yet have a relatively low frequency of occurrence and a high severity of impact when they do occur. When
the likelihood of occurrence of known, however they cannot be measured. This is the key area that this risk
management standard will address. This is project specific risk that must be managed at the project level.
• Unknown – Unknown – These situations cannot be identified in advance; their potential can only be
acknowledged. Again, historical records may provide some guidance on the extent that unknown-unknowns
have had on past projects. Project must not include these risks as part of project risk management.
The cost and schedule impact of known-unknown risk cannot be measured for a specific data point and there can
be a range of possible outcomes. The deterministic estimated cost includes the risk that are known-knowns, however
the known-unknown risk must be managed separately outside of the base estimate.
Risk Controls
Controls are discrete tasks that are identified and implemented on the project to minimize the impact or eliminate
the likelihood of occurrence of a particular risk.
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First Level Risk Control
Initial risk assessment includes all risks that can impact the outcome of a project. The first level of risk mitigation
includes the following strategies [1, p16].
• Risk avoidance
• Risk reduction
• Risk sharing
• Risk transfer
• Insurance
A risk management plan is established at the beginning of the option selection stage and the above strategies must
be implemented to mitigate project risks from an owner’s perspective.
Once the above strategies to mitigate risks are exhausted, the last one remains is to accept the residual risk which
is:
• Risk acceptance by including contingency amount (time and money) to the project estimate and schedule.
All Residual risks are accounted for and accepted by including contingency to the project estimate and schedule.
Second Level Risk Control
This paper introduces the second level of control that can be in place to minimize the impact or reduce the likelihood
of occurrence of the residual risks. Second level controls are discrete tasks that are identified and included in project
baseline schedule and cost estimate and are part of project budget.
Control
Control1
Root Cause Owner
1 Control
Control 2
Risk Owner
Root Cause Control
Control1
2 Owner
Figure 1–Second Level Risk Control Example
Figure 1 describes the process of identifying controls for individual risk items and assigning control owners. This
method can be included as part of the risk management plan to demonstrate project team not only mentioning
strategies to eliminate, but planning to implement the controls regardless of risk occurrence.
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Risk controls are individual tasks identified to be implemented on a project to minimize the likelihood and impact of
risk events.
Risk Root Cause Control Control Owner

Engineering skill Engineering contractors Identify key resource Engineering manager
availability issue have multiple projects requirement with the
with similar need for engineering contractor
expertise and ask for resumes and
identify key resources for
availability
Interview key resources Engineering manager
and ensure their
availability
Overseas procurement – Delays in fabrication – Dedicated expeditor Project manager
fabrication and delivery may trigger air freight
delays
Weekly meeting with the Project manager
vendor
Additional site visits and Project manager
witness key schedule
milestones
Table 1–Second Level Control Examples
The controls described above in Table 1 must be identified and incorporated into the project risk management plan.
Please refer to [2] for further information on how to develop a risk management plan.
Each risk event may have one or more identified controls that must be included as part of the project estimate and
schedule. For example, one risk event in Table 1 is “Engineering skill availability issue”. In the example, the project
team brainstormed and identified control of this risk event as:
1. Identify key resource requirement with the engineering contractor and ask for resumes and identify key
resources for availability
2. Interview key resources and ensure their availability
The above controls are planned to be in place regardless of risk event occurring. The above controls will be part of
the execution plan and should minimize the likelihood of this risk of availability of skilled engineering resources.
Each and every control must have an owner assigned for accountability and responsibility. This will ensure the
controls are in place and in time during the execution of the project as planned.
Contingency Management Process
Contingency is an amount added to an estimate (of cost, time, or other planned resource) to allow for items,
conditions, or events for which the state, occurrence, and/or effect is uncertain and that experience shows will likely
result, in aggregate, in additional cost [3].
A detailed risk analysis is conducted to arrive at the cost contingency required to accept the residuals risks in a
project. Please refer to [4] for further information on methods to conduct a probabilistic risk assessment.
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Once the cost contingency amount is established, it is left to the project manager to manage the allotted contingency
to complete the project with desired outcome. There are three discrete deliverables that are associated with
management of contingency and their differences are often misunderstood or confused.
Budget Drawdown: Contingency drawdown on the budget side occurs as change orders, that are in-scope changes,
are approved and the budget at completion (BAC) is updated for both the impacted WBS account and the
contingency account. This drawdown occurs on the budget side and provides a status of level of contingency that
has been utilized in the project at any given time. As described in the overview section, contingency only includes
impact of identified risks. So changes resulting from unknown risk such as external scope, major change in strategy,
etc. that are not part of project basis or identified risks, should not be drawn down from the contingency budget.
This ensures accountability of budget management for the project and scope or major strategy changes are funded
from other sources. However, the project team must understand the scope and the project basis (assumptions and
exclusions) correctly for effective change management.
Contingency EAC: Contingency EAC which is forecasting the remaining contingency on the forecast side is different
and independent of budget drawdown. Forecasting the scope item is forecasting the total remaining scope based
on performance from earned value management (EVM). There are many methods that can be employed while
calculating the forecast of a scope item. A very similar concept is introduced here for forecasting contingency.
Contingency EAC is the estimation of cost required to cover the remaining risk on the project and it is completely
independent of actual cost to date, changes on the project etc. Contingency EAC is an independent estimation of
amount of money required to cover the impact of all remaining risks on the project.
Contingency Spent (Cashflow) : The cashflow for the remaining contingency is also very similar to cashflow for any
scope item or deliverable. Contingency EAC is a reduction of the contingency amount in the contingency account.
Now the remaining contingency must be time-phased as the project team estimates the timing of the actual spent
on the contingency account. Cashflow for the contingency EAC must be done independently reviewing the historical
trends, basis for the schedule, critical activities that are impacted etc. Contingency must be considered as any other
WBS item while computing the monthly spent for cashflow purposes. Many projects utilize the same curve for the
drawdown as the cashflow and experience cashflow issues between years and months.
Contingency management, like other scope deliverables, involves planning and forecasting.
Contingency Drawdown Plan
The contingency drawdown plan is one of the most important activities in the overall contingency management
process. There are many ways this can be accomplished. This paper introduces the milestone-based approach to
bring simplicity and better understanding of the overall management of contingency from an owner’s perspective.
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Sample Contingency drawdown curve

Program Reporting Period
Project # Revision
Description Prepare By
Project Estimate
%
Estimated Contingency
WBS
Cost from CSRA
Continge Overal % Top Project Risks
ncy
Engineering $ 100,000 $ 15,000 15% 11% 1 Risk 1
Procurement $ 500,000 $ 40,000 8% 29% 2 Risk 2
Construction $ 300,000 $ 60,000 20% 43% 3 Risk 3
Owner Cost $ 50,000 $ 5,000 10% 4% 4 Risk 4
Start-up Support $ 50,000 $ 10,000 20% 7% 5 Risk 5
Close Out $ 50,000 $ 10,000 20% 7% 6 Risk 6
Escalation $ 10,000 $ - 7 Risk 7
Contingency $ 140,000 $ - 8 Risk 8
9 Risk 9
Stage Total $ 1,200,000 $ 140,000 100% 10 Risk 10
Drawdown Plan
$100,000
$90,000
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$-
Drawdown Plan
Basis of drawdown Plan / Notes :
Figure 2–Contingency Drawdown Plan Template
Contingency drawdown plan shown above in Figure.2 utilizes key milestones for all phases. Project teams must
identify key milestones by phase/element and prepare the contingency draw down plan.
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Weighted
WBS Milestones Weightage Contingency Milestone date Jan-24 Feb-24 Mar-24 Apr-24
allocation
Engineering
Kick-off 1% $ 150 5-Mar-24 0 0 150 0
Process Design Basis 2% $ 300 4-May-24 0 0 0 0
P&ID IFC 3% $ 450 13-Jun-24 0 0 0 0
Process data sheet for major equipment 2% $ 300 14-May-24 0 0 0 0
Instrument Data sheets 2% $ 300 28-Jul-24 0 0 0 0
Mechanical data sheets and specifications 2% $ 300 12-Aug-24 0 0 0 0
Plot Plan 2% $ 300 2-Aug-24 0 0 0 0
Instrument Location diagrams 2% $ 300 21-Sep-24 0 0 0 0
Control Equipment specifications 2% $ 300 30-Nov-24 0 0 0 0
Electrical Equipment specifications 2% $ 300 30-Mar-25 0 0 0 0
One Line diagrams 5% $ 750 28-Feb-25 0 0 0 0
PO for major equipment placed 15% $ 2,250 31-Oct-24 0 0 0 0
Certified vendor data ( Rev B) 10% $ 1,500 29-Jan-25 0 0 0 0
3D Modeling 90% 10% $ 1,500 28-Feb-25 0 0 0 0
All IFC Release 10% $ 1,500 28-Jun-25 0 0 0 0
Construction Work Packages complete 10% $ 1,500 27-Aug-25 0 0 0 0
All Holds Released 20% $ 3,000 26-Sep-25 0 0 0 0
Table 2–Engineering Milestone Example
Weighted
WBS Milestones Weightage Contingency Milestone date Jan-24 Feb-24 Mar-24 Apr-24
allocation
Procurement
Major Long Lead PO placed 5% $ 2,000 31-Oct-24 0 0 0 0
Received certified vendor data for major orders 10% $ 4,000 29-Jan-25 0 0 0 0
Tagged instruments ordered 5% $ 2,000 20-Dec-24 0 0 0 0
Pipe fabrication complete 10% $ 4,000 27-Aug-25 0 0 0 0
Engineered bulk material ordered 10% $ 4,000 28-Jul-25 0 0 0 0
Received major equipment 10% $ 4,000 28-Jun-25 0 0 0 0
Received all equipment 20% $ 8,000 27-Aug-25 0 0 0 0
Received tagged instruments 10% $ 4,000 20-Jun-25 0 0 0 0
Received bulks 10% $ 4,000 15-Dec-25 0 0 0 0
All inspection, NDE testing complete 10% $ 4,000 14-Jan-26 0 0 0 0
Table 3–Procurement Milestone Example

Weighted
WBS Milestones Weightage Contingency Milestone date Oct-25 Nov-25 Dec-25 Jan-26 Feb-26 Mar-26 Apr-26 May-26
allocation
Construction
Constructions contracts in place 2% $ 1,200 26-Oct-25 1200 0 0 0 0 0 0 0
Mobilization complete 3% $ 1,800 25-Dec-25 0 0 1800 0 0 0 0 0
Earth work and civil work complete 2% $ 1,200 4-Apr-26 0 0 0 0 0 0 1200 0
Piling work complete 3% $ 1,800 4-May-26 0 0 0 0 0 0 0 1800
Building work complete 5% $ 3,000 12-Aug-26 0 0 0 0 0 0 0 0
Strcutural steel work complete 5% $ 3,000 3-Jun-26 0 0 0 0 0 0 0 0
Equipment installed 10% $ 6,000 2-Aug-26 0 0 0 0 0 0 0 0
E/I equipment installed 5% $ 3,000 11-Sep-26 0 0 0 0 0 0 0 0
Piping work complete 15% $ 9,000 11-Sep-26 0 0 0 0 0 0 0 0
Pain/Insulation complete 5% $ 3,000 10-Nov-26 0 0 0 0 0 0 0 0
Mechanical completion 20% $ 12,000 9-Jan-27 0 0 0 0 0 0 0 0
Work package pre-start-up walk complete 20% $ 12,000 24-Jan-27 0 0 0 0 0 0 0 0
All Priority 1 & 2 punchlist complete 5% $ 3,000 23-Feb-27 0 0 0 0 0 0 0 0
Table 4–Construction Milestone Example
Weighted
WBS Milestones Weightage Contingency Milestone date Oct-25 Nov-25 Dec-25 Jan-26 Feb-26 Mar-26
allocation
Owner Cost
Owner team identified and mobilized 5% $ 250 28-Jun-25 0 0 0 0 0 0
Land acquisition complete 5% $ 250 21-Sep-24 0 0 0 0 0 0
Permit secured 5% $ 250 5-Mar-24 0 0 0 0 0 0
Temporary facilities complete 5% $ 250 15-Dec-25 0 0 250 0 0 0
Risk control owners identified 5% $ 250 5-Mar-24 0 0 0 0 0 0
Budget owners assigned 5% $ 250 5-Mar-24 0 0 0 0 0 0
Owner systems and processes in place 5% $ 250 24-Apr-24 0 0 0 0 0 0
Safety PPE, rental equipment all mobilized 5% $ 250 28-Jun-25 0 0 0 0 0 0
Detailed design complete 10% $ 500 26-Sep-25 0 0 0 0 0 0
All procurement packages received 10% $ 500 15-Dec-25 0 0 500 0 0 0
All construction complete 20% $ 1,000 9-Jan-27 0 0 0 0 0 0
Start-up complete 20% $ 1,000 24-May-27 0 0 0 0 0 0
Table 5–Owner Cost Milestone Example
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The above tables (2 through 5) represent key milestones that once accomplished inherent risks associated with the
tasks are either realized or mitigated, hence the contingency associated with the tasks can be drawdown and
remaining contingency required for realization of remaining risk can be reduced.
The weight of each milestone may vary depending on the organization; however, it must be determined prior to
completing risk management plan.
This method eliminates the guess work for the remaining contingency and utilizes the project schedule milestones.
This also helps in reconciling the actual drawdown which is explained in the next section.
Contingency Drawdown Forecast
Actual drawdown of contingency to arrive at the remaining contingency required can follow the same basis of actual
milestones being completed. The project team can use the same document and basis and update the actual
milestones per the latest schedule.
In addition to above the following must be considered for more accurate forecast of contingency.
• Additional contingency required for risks that are not planned earlier or impact of risks higher than
estimated at the time of estimate
• Variance of 10% of higher from the drawdown plan
The project team can perform probabilistic risk modeling at a time interval of three months to re-estimate the
remaining contingency and re-calibrate the drawdown forecast. This will ensure the new risks are factored into the
drawdown forecast and also it helps with analyzing risks that have an impact higher than originally estimated.
Contingency Drawdown Cashflow
Cashflow for the contingency drawdown refers to the actual spent or planned spent of the allotted contingency
amount and is reported together with base cost as the overall project cashflow. Cashflow for any WBS involves the
total forecast and the plan of expenditure of the total budget or the forecast for the lifecycle cost of the WBS item.
A similar process must be established while calculating cashflow for contingency item.
During probabilistic risk analysis, critical tasks within the project are selected to run the Monte Carlo simulation to
arrive at the contingency amount. Contingency must be broken down between the selected critical tasks and
cashflow for contingency can follow the same schedule as the schedule for the critical tasks.
Conclusion
Risk management and contingency management is the area of concern and presents the best chances of controlling
the outcome of a project. The paper provides concept of risk management (known-known, known-unknown and
unknown-unknown) and introduced the concept of risk controls (first level and second level) that can be put in place
to control the impact and likelihood of occurrence of the risks. First level risk controls are implemented prior to
establishing contingency amounts. The second level risk controls are established for the residual risks that are not
mitigated with the first level controls or mitigation strategies.
The paper also described the contingency management strategy. The paper introduces the concept of drawdown
plan based on project milestones which are true representations of project progress. The paper also describes the
requirement for quarterly detailed risk assessment to include new risks and the impact of existing risks that are
higher than estimated.
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While this paper attempts to introduce some concepts around risk controls and contingency management, research
should be conducted to further develop more strategies that can be used to manage capital projects more efficiently.
References
1. Construction Industry Institute, Management of Project Risks and Uncertainties, Version 1.1
2. AACE International, Recommended Practice No. 72R-12, Developing a Project Risk Management Plan,
Morgantown, WV: AACE International, Latest revision.
3. AACE International, Total Cost Management Framework, 7.6 Risk Management, Morgantown, WV: AACE
International, Latest revision.
4. Construction Industry Institute, Probabilistic Risk Management in Design and Construction Projects, Version 1.1
Rajmohan Mishra
SNC-Lavalin
rajmohan.mishra@fgould.com
OWN-4166.10

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2023 AACE® INTERNATIONAL TECHNICAL PAPER

Project Contingency Forecasting–

First Level Risk Control

Second Level Risk Control

Figure 1–Second Level Risk Control Example

Risk Root Cause Control Control Owner

Contingency Management Process

Contingency Drawdown Plan

Sample Contingency drawdown curve

Basis of drawdown Plan / Notes :

Figure 2–Contingency Drawdown Plan Template

Table 2–Engineering Milestone Example

Table 3–Procurement Milestone Example

Table 4–Construction Milestone Example

Table 5–Owner Cost Milestone Example

Contingency Drawdown Forecast

Contingency Drawdown Cashflow

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