Why projects often fail even with high cost contingencies
In this note we assume that the individual risks have been adequately quantified and the total project cost contingency adequately computed to ensure an agreed-to probability or confidence level that the total project cost estimate will not be exceeded. But even projects that implement such a process are likely to result in significant cost overruns and/or project failure if the project manager allocates the contingencies to the individual subsystems. The intuitive and mathematically valid solution is to maintain a project-wide contingency and to distribute it to the individual risks on an as-needed basis. Such an approach ensures cost-efficient risk management, and projects that implement it are more likely to succeed and to cost less. We illustrate these ideas using a simplified project with two independent risks. The formulation can readily be extended to multiple risks.
- Research Organization:
- Lawrence Berkeley National Lab. (LBNL), Berkeley, CA (United States)
- Sponsoring Organization:
- USDOE Director, Office of Science (US)
- DOE Contract Number:
- AC03-76SF00098
- OSTI ID:
- 802046
- Report Number(s):
- LBNL-51349; LBID-2382; R&D Project: RSYS01; B& R YN0100000; TRN: US200223%%536
- Resource Relation:
- Other Information: PBD: 28 Feb 2002
- Country of Publication:
- United States
- Language:
- English
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