Cost contingency analysis for construction projects using spreadsheets

Abstract

Construction projects are risky by nature. There are many variables affecting the outcome of a construction project especially its final cost. To account for the various cost increase risks, many owners and contractors allocate a contingency amount to each project. Owners allocate a contingency amount to their budgets for upcoming projects, while contractors attach a contingency amount to all their submitted bids. There are a number of methods that can be used to determine the contingency amount ranging from expert opinions to simulations. The purpose of this article is to present a quantitative approach for performing contingency analysis for a construction projects using basic spreadsheet techniques. The approach is applied to a practical case study and a sensitivity analysis of the results is carried out. Practicing contractors can use the developed spreadsheet to analyze cost overrun risks. Furthermore, risk management is becoming an important aspect in any construction curricula and the approach presented here can be used to teach students how to perform a quantitative contingency analysis for construction costs. The spreadsheet implementation, unlike other black-box risk analysis tools, allows the user to actually see how the analysis is done.