26th International Association for Management of Technology Conference - IAMOT 2017

This paper presents quantitative evidence of the advantages of modern estimating tools and techniques, such as Monte Carlo Simulation, over more traditional, “rules based on experience” to estimate project contingency. These rules refer to statements such as “Add 10% of the project capital cost as contingency to the estimate when going into project execution”. Project contingency may be calculated by using a percentage of the estimated cost, a fixed number, or be developed by using quantitative analysis methods (Project Management Institute, 2009, p. 173). The research presented here tested "rules based on experience" by comparing their results against the contingency estimates of a portfolio of 86 port and rail capital projects, using Monte Carlo simulation. The research outcome started with a practical problem in a technological environment related to port and rail capital projects. The project portfolio included seven groupings of projects which were arranged per their scope. The idea was that since the projects were of a similar scope, one could conduct a Monte Carlo simulation of the individual project risk registers and use the simulation result to predict the contingency requirements for the various groups of projects. The outcome of this could then be employed during estimating project cost by using statements like “When building a stacking area for containers, a contingency of 12% should be added to the project budget to fund the consequence of risks realising on the project”. The following steps were followed during this research: - The risk registers for the 86 projects were cleaned up and combined into one risk register and allocated to one of seven groups, based on project scope. - Aggregation functions were created to determine the contingency requirements for each of the individual projects. The P80 value of the individual risks registers were simulated and compared to a contingency of 10%,based on the project capital values. - The individual P80 values of the risk registers were then calculated using @Risk software. The graphical results of the individual projects and groupings were interpreted. The simulation research results included the following: - The P80 values of the risk registers varied from 4.0% to 475% over the 86 projects. - Significant variance existed inside the seven project groups, leading to conclude that “rules based on experience” are not appropriate in estimating project contingency. These findings are important in the technological environment of port and rail capital projects because they highlight the following aspects related to project management: - Project contingency estimates are context specific. - “Rules based on experience” may overestimate the contingency requirements of a project.