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Unformatted text preview: ;most likely" total cost of the project at completion. Consequently, the client and/or project management may want to add this additional amount on to the budget as contingency. This is how the need for contingency arises. Page 234 The client and project management may agree that the nature of the project is a risky business. In fact, the contract may even acknowledge the risk, as, for instance, a cost-plus-incentive-fee contract. The incentive scheme may be something like this: the company executing the project gets 25% of any of the contingency it saves but must pay 25% of all costs above the total planned cost plus the contingency. In other words, the contractor has an opportunity to make even more profit than planned, but if the project is poorly managed it makes less profit than planned. Now that we know what contingency is, we can return to the original question of what level of the WBS is appropriate for risk management. We can now see that this is really a question about what level of the WBS is appropriate for managing the contingency budget. But this leads to yet another question: what is meant by the phrase managing the contingency budget? We will leave the answer to that question to the next section. For now, we will just say that it usually does not make sense to manage the contingency budget at the work package level. The reason for this is that the contingency budget (in either labor-hours or costs) is usually considerably less than the control budget. Consequently, it does not seem reasonable to expend as much effort managing the contingency budget as the control budget. Also, if we do a good job managing the control budget, it follows that we will probably have done a good job managing the contingency. 9.2— Contingency Draw- Down What we have seen in the previous section can be expressed in another way: contingency is the quantification of risk. Since contingency is a budget, it should have the same components as our other budgets— units of measure, quantities in those units, labor-hours, and costs. As a rule of thumb, the level at which the contingency budget is developed should be the lowest level at which to consider managing contingency. Page 235 Some projects for which risk must be assessed may have certain summary-level control packages that are much riskier than others. In this case, project management may want to specifically assess the risk of these risky control packages and use some other technique for assessing the risk of all the other legs of the WBS hierarchy together. On other projects, no attempt may be made to assess the risk of any summary-level control package except the root package at the top of the hierarchy. The reason for this may be that an organization engages in similar projects on a regular basis and has good historical information about the planned cost for projects and the actual cost of the projects at completion. From this an average contingency percentage might be calculated that is used for all projects of a certain type. So the contingency may be arrived at quite differently on different projects. In one case there ma...
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This note was uploaded on 01/11/2011 for the course ACC 9 taught by Professor Yeetan during the Spring '10 term at Sunway University College.
- Spring '10