- Problem Definition
Downstream Oil & Gas Business Unit in a company plan to make a new Fuel Terminal, The Project Management Division asked to make a cost estimation for the Project.
Most of our contract, has cost overrun. Therefore, it is necessary to prepare cost contingency for the Project to anticipate the additional cost.
- Development of Feasible Alternatives
There are 4 methods to estimate cost (also time) contingency:
- Expert Judgment
- Predetermined Guidelines
- Simulation Analysis
- Range Estimation
- Expected Value
- Parametric Modeling
For this case, Author uses Simulation Analysis with Range Estimation method.
Range estimating is a risk analysis technology that combines Monte Carlo sampling, a focus on the few critical items, and heuristics (rules of thumb) to rank critical risks and opportunities. This approach is used to establish the range of the total project estimate and to define how contingency should be allocated among the critical items.
- Possible Solution
The following steps will be used to determine cost contingency using range estimating:
- Determines of ranges for each cost items.
- Determines the probability that each item can be completed within the estimate.
- Running Monte Carlo simulation for the cost range.
- Determines of critical items based on result of Monte Carlo simulation.
- Determine of contingency with reference to critical items only.
Following are base estimates for each cost items:
Table 1: Base Estimates for Fuel Terminal
Through a risk analysis and based on historical information, range of each cost items was determined, as shown on table 2. Table 2 also contains the desired probability for each item, which come from management policy.
Table 2: Range and Desired Probability
After determining range and desired probability of cost items, further step is to conduct Monte Carlo simulation with the result as shown on Table 3.
Table 3: Monte Carlo Simulation
- Selection Criteria
Determines of critical items are conducted by using the following criteria.
Table 4: Bottom Line Critical Variances
- Analysis and Comparison of the Alternatives
By using above criteria (for Classes 3, 4, 5), critical items were determined as shown in Table 5.
Table 5: Data
- Selection and Preferred Alternatives
The last step is to determine the cost contingency, as shown in table 6.
Table 6: Proposed Solution
- Performance Monitoring and the Post Evaluation of Result
It is necessary to conduct strict monitoring during implementation of the Project, to prevent the cost overrun exceed the cost contingency.
- Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick. (2014). Engineering Economy 16th edition Chapter 12 page 546- 554, England: Pearson Education Limited.
- AACE International Recommended Practice No. 41R-08
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- AACE International Recommended Practice No. 44R-08
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- W10_RM_Contingency Estimation in Gas Station Project
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