The most common approach to contingency management is contingency drawdown, i.e., reductionof contingency funds through financing realized risks. With this approach, correlation betweenremaining contingency and actual identified project risks is weak (risks are dynamic, contingency isquasi-static – the only changes are through drawdown). This approach does not encourage projectteams to efficiently manage project budgets, as it promotes the use of contingency as a slush fundto subsidize any underperforming project areas, instead of addressing actual execution inefficiencies.This article describes a structured approach to dynamically adjust contingencies based on periodicquantification of all identified and active project risks. The proposed methodology uses a RiskDrawdown Curve (RDC) representing a time-trend of the magnitude of all outstanding project risksat given probability levels. The RDC is forward-looking whereas the current practice of contingencydrawdown is back looking into the project’s history. The RDC enables strong correlation betweenavailable project contingency and the value of all remaining project risks. As a result, cost and currentschedule updates during execution always accurately reflect remaining project uncertainties. Thisarticle was first presented at the 2018 AACE International Conference & Expo as RISK.2795.
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