Cost Contingency

Cost contingency

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When estimating the cost for a project, product or other item or investment, there is always uncertainty as to the precise content of all items in the estimate, how work will be performed, what work conditions will be like when the project is executed and so on. These uncertainties are risks to the project. Some refer to these risks as "known-unknowns" because the estimator is aware of them, and based on past experience, can even estimate their probable costs. The estimated costs of the known-unknowns is referred to by cost estimators as cost contingency.

AACE International, the Association for the Advancement of Cost engineering, has defined contingency as "An amount added to an estimate to allow for items, conditions, or events for which the state, occurrence, or effect is uncertain and that experience shows will likely result, in aggregate, in additional costs. Typically estimated using statistical analysis or judgment based on past asset or project experience. Contingency usually excludes:

1. Major scope changes such as changes in end product specification, capacities, building sizes, and location of the asset or project;

2. Extraordinary events such as major strikes and natural disasters;

3. Management reserves; and

4. Escalation and currency effects.

On 7/27/11, he wrote:

Contingency cost are the additinal cost that happen while we are running a project and this cost have effect to the project that we have to spend some of budget to let the project running forward. Contingency cost usually estimated or judgement base of the past experience and exclude the list below:

1. Major scope changes such as changes in end product specification, capacities, building sizes, and location of the asset or project

2. Extraordinary events such as major strikes and natural disasters

3. Management reserve

4. Escalation and currency effects.