Effective contingency drawdown management
Accurately predicting how much contingency you might need on your project is a difficult but well understood issue. What can be even harder to calculate, is the rate at which you may need to spend it throughout the project, aligned to the risk profile. Depending on the contingency methodology adopted, not all cost increases can be drawn from contingency, so you might be forecasting a cost overrun on your project but still have contingency left over.
In November 2019, we recorded a live, 30 minute webinar with key decision makers across the natural resources, real estate and infrastructure industries. During the webinar, we analysed the limitations of current techniques used on oil and gas projects to drawdown contingency, and provided some of our methodologies to highlight whether the project is drawing down too fast on its contingency, or indeed holding onto it beyond its requirement.
By listening to our recorded webinar below you can expect to come away with answers to questions including:
- What’s wrong with holding a fund of money for use as and when required?
- How can I link my risk register to my QCRA output?
- Why should I return contingency to management if I might need it later?
Contingency costs and risk management
Live polling questions during the event challenged participants to answer two important questions:
- Your project has US$100k set aside for weather delays but suffers a US$1m delay. There is US$1.5m available contingency from the project quantitative cost risk assessment (QCRA). How much money would you draw down from your contingency fund?
Over half of attendees would incorrectly choose to drawdown more money than assigned to this weather event (i.e. > US$100k), leading to a potential future cost overrun if other risks emerge.
- Good operating best practice can be to link the risk register to the contingency generated by the QCRA. Thinking about your last project, did you have either or both, and were they linked?
Only 25 percent of attendees follow our suggestion to link the risk register to the contingency generated by the QCRA, ensuring that risks are routinely re-addressed and change control is prominent.
The polling results showed that greater understanding of the risks of contingency mismanagement is required across project management teams.
Our five top tips for managing contingency drawdown
- Not a one-off event: The production of a Risk Register and the running of a QCRA is not a one-time event to get through an approval gate, it is the basis of good project controls and should be carried out regularly throughout the life of the project.
- Risk registers need to be visible: It identifies the risks and the consequences if the risk occurs, the probability of that risk occurring (from rare to almost certain) and what the impact that would have (ranging from insignificant to catastrophic)
- Always use a contingency drawdown curve: regularly report and forecast against this
- Depending on the contingency methodology adopted, not all cost increases are covered by contingency: it is possible to forecast a cost overrun and still have contingency left
- Give back unused contingency: this can be used by management on other projects
Our methodology is a recommended approach, but may not be applicable or can be inappropriate for a particular organisation's needs. Please discuss with us if our approach is suitable for your specific project.
For further information contact:
Mike Younger - Director
e: [email protected]
Aileen Jamieson - Director
e: [email protected]