**Contingency Cost Determination in Transformer Installation Project
**

**1. Problem Recognition, Definition and Evaluation
**

To increase its capacity, a new 33MVA 132/22kV transformer needs to be installed at Blackberry Substation. This project includes installation of a new transformer circuit, transformer and a 22kV switchboard in a new switchroom. Also included in this project is installation of all required protection relays, communication and SCADA works. This project does not include installation of 22kV feeders from the new switchboard to the distribution network.

The project was estimated using combination of bottom up method and stochastic method. The estimate is $6,265,000. Total budget for this project is consist of project base estimate, project cost contingency and management reserve. The cost contingency and management reserve is calculated based on project risk assessment.

**2. Development of feasible alternatives
**

Based on historical data, for this type of project, a systemic risk associated with the level of completed design to the actual cost result is identified. The risk is following a formula as shown below.

y = -0.3229 (x) + 0.3637

standard deviation = 0.65936

This estimate was developed with 85% design completed. Using the formula, a probability distribution graph is developed, as shown at Figure 1.

Figure 1. Parametric risk on % design to the estimate accuracy

Using Delphi method, several project specific risks were identified and quantified. Those risks are shown in Figure 2.

Figure 2. Risk identification and quantitative analysis table.

**3. Development of outcomes for each alternative
**

A distribution graph is developed for each of the risk. The graph is produced based on quantitative risk analysis based on expected value method. In this method the Probability of Occurrence (P) is multiplied with risk Impact (I). The risk impact is assumed to follow Pert probability distribution.

The probability distribution for each risk is shown in Table 1.

Name | Graph | ||

R001 |
|||

R002 |
|||

R003 |
|||

R004 |
|||

R005 |
|||

Systemic Risk |

Table 1. Probability distribution for each risk

Each graph for R001 to R005 in Table 1 shows a vertical bar at the left side of the graph. The bar represents the percentage of Probability of Occurrence that the risk is not occurred. The hump on the right represent when the risk is occurred and the impact is following the probability distribution model.

**4. Selection of Criterion
**

As per the AACE International Recommended Practices No. 44R-08 and 41R-08, the risks should be screened according to its impact to the overall project cost. Table 2 shows the criteria.

Bottom Line Critical Variances |
||

Bottom Line (Cost or Profit) | Conceptual Estimates (Classes 3,4,5) | Detailed Estimates (Classes 2,1) |

Cost ∆ |
±0.5% |
±0.2% |

Profit ∆ |
±5.0% |
±2.0% |

Table 2. Risk screening criteria

**5. Analysis and Comparison of the Alternatives
**

The mean value for each of the risk is shown in Table 3.

Name | Mean Value | ∆ Cost |

R001 |
$186,763 |
3.0% |

R002 |
$55,455 |
0.9% |

R003 |
$29,921 |
0.5% |

R004 |
$112,227 |
1.8% |

R005 |
$12,459 |
0.2% |

Systemic Risk |
$559,276 |
8.9% |

Table 3. Risk ∆Cost calculation.

**6. Selection of Preferred Alternatives
**

Based on Table 3, the ∆Cost of risk R005 is less that 0.5%. Because of that R005 should be removed from the contingency calculation.

So, after the removal of risk R005, the overall risks used for contingency calculation is shown in Figure 3.

Figure 3. List of risks for contingency calculation.

**7. Performance monitoring and post evaluation result
**

With the risks listed in Figure 3 and the base estimate are use to calculate the contingency fund and the amount of management reserve. The probability distribution graph and the cumulative curve are shown at Figure 4.

Figure 4. Probability distribution for the overall project cost

The base estimate is $6,265,000, which represent the 0.7% percentile. The P50 is $7,208,506. Assuming that contingency cost determination is using P50, then the contingency cost for this project is calculated using this following formula:

$7,208,506 – $6,265,000 = **$943,506**.

It is assumed that the management reserve is calculated at P95. The P95 for this project is at $7,844,194. So, the management reserve for this project is calculated using the following formula:

$7,844,194 – $7,208,506 = **$635,688
**

After the project is approved, it is essential that the risk is monitored. If the risk is eventuated, then the amount of contingency spent to mitigate the risk should be recorded. For any non-eventuated risks, the amount of fund allocated for the risk should be return back to the project sponsor, so then it can be used for other project.

**References
**

Hamilton, A. C. (2012). Risk Management. In S. Amos (Ed.), Skill & Knowledge of Cost Engineering (5th Ed.) (pp.31.1-31.9). USA: CreateSpace.

Sullivan, W. G., Wicks, E. M., & Koelling, C. P. (2012). Engineering Economy (15th Ed.) (pp. 478-514). New Jersey, United States: Prentice Hall.

AACE International Recommended Practice 44R-08, *Risk Analysis and Contingency Determination Using Range Estimating* (latest revision), AACE International, Morgantown, WV, USA

AACE International Recommended Practice 41R-08, *Risk Analysis and Contingency Determination Using Expected Value* (latest revision), AACE International, Morgantown, WV, USA

AACE International Recommended Practice 42R-08, *Risk Analysis and Contingency Determination Using Parametric Estimating* (latest revision), AACE International, Morgantown, WV, USA

Palisade. (2013). @Risk (version 6.1.3). [computer software]. New York, USA.

AWESOME posting, Pak Sadat!!! Perfect case study for this course and you did an outstanding job on your analysis using Monte Carlo simulation!!

WOW!!!

My only challenge to you is this is a week late. Meaning you should be doing your W4 posting either Sunday or Monday, which will leave Tuesday, Wednesday Thursday to work on your paper and Friday & Saturday to work on your Weekly Report. Don’t forget that once you fall behind it is almost IMPOSSIBLE to catch up so my best advice is to get AHEAD of schedule by one blog posting….. That way, you have a SAFETY BUFFER if and when something happens that you have no control over….

BR,

Dr. PDG, Jakarta

Pingback: W20_YAW_Contingency Estimation in Storage Tank Project | Kristal AACE 2014

Pingback: W10_RM_Contingency Estimation in Gas Station Project | Golden AACE 2015