Abstract:
This paper combines various concepts related to (i) project risk management,
(ii) Monte Carlo simulation, (iii) project contingency cost estimation,
and (iv) the relationship between project and programme risks, to illustrate that
the contingency requirements are lower when simulating all the risks in the programme
when comparing it with the individual project contingency requirement.
A case study organisation provided 86 quantified risk registers related to port
and rail capital projects. For each of these risk registers, the project contingency
was estimated using a prescribed risk register template and Monte Carlo simulation
software. The same 86 quantified risk registers were then used to simulate
the programme contingency. The simulation results indicated that the programme
contingency requirement was approximately 8% points lower than that of the
sum of the individual projects. The first implication of this research result is that,
should borrowed capital be used to fund the projects, the interest bill would be
higher when calculating project contingency on a project-by-project basis. The
second is that regularly appearing low probability, high impact risks, should be
identified and these risks should be quantified not in the projects themselves, but
in a centrally managed, programme cost contingency fund.
