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The effect on contingency allowances of using risk analysis in capital cost estimating: a Hong Kong case study

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  • Stephen Mak
  • Jenny Wong
  • David Picken

Abstract

In 1993 the Hong Kong Government implemented a methodology for capital cost estimating using risk analysis (ERA) in its estimating for the planning of public works projects. ERA is a simple approach and is used to estimate and calculate an amount of money to allow for uncertainties associated with a project. This calculated amount of money replaces the pre-1993 contingency allowance, which was merely a percentage addition on top of the base estimate of a project. A team approach is adopted to identify, classify and cost the uncertainties associated with a project. The sum of the 'average risk allowance' for the identified risk events thus becomes the 'contingency'. A study of the effect of ERA was carried out to compare the variability and consistency of the contingency estimates between non-ERA and ERA projects. This paper presents preliminary results of a survey which compares a total of 72 non-ERA and 19 ERA projects. The result shows a significant difference in variation and consistency between these groups. It indicates initial success in using the ERA method for public works projects to reduce unnecessary and exaggerated allowance for risk. Further improvement and refinement of the ERA method is suggested.

Suggested Citation

  • Stephen Mak & Jenny Wong & David Picken, 1998. "The effect on contingency allowances of using risk analysis in capital cost estimating: a Hong Kong case study," Construction Management and Economics, Taylor & Francis Journals, vol. 16(6), pages 615-619.
    • Handle: RePEc:taf:conmgt:v:16:y:1998:i:6:p:615-619
    DOI: 10.1080/014461998371917
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