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The Project’s Success leads to Business Success. A Study on Calculating the Optimal Contingency and Management Reserves for Project Budget (프로젝트 예산 편성을 위한 적정 예비비 산정에 관한 연구) Kwon, HyukChun CPA / PMP November27th,2009
Theory Theory UAA, MSPM PMBOK Guide, Text Book, Case Study
The Factors to affect Project Risk Theory Uncertainty (Known, Unknown, Identified, Not Identified) * External Environment Stakeholders Project Team Members * Internal Project Boundary Human Resources
Internal Factors – Human Resource Theory * Stakeholder’s Risk Tolerance Risk Tolerance Line Probability Impact * Team Member’s
Required Skill (Tech, Leadership, Communication …)
-> Refer to NASA Cost Estimating Hand Book Volume 4
Cost /Time / Scope / Risk Theory Budget without Risk Scope with Risk Scope without Risk (Scope Management) Cost Management Budget with Risk Resources Risk Management Scope (WBS) Resource Management Time Time Management
Risk / Budget Theory (Net Cost) (Contingency Reserve) (Allowance) (Management Reserve) (Point Estimate) PMI Global Congress North America 2007
Budget Theory Resources Allowance (Unknown Knowns) Contingency Reserve (Known Unknowns) Net Cost (Known Knowns) Management Reserve (Unknown Unknowns) Uncertainty(Risk) Time Point Estimate Budget Base Line Total Project Budget
Contingency & Management Reserve Theory Management Reserve Contingency Reserve included From PMBOK Guide, page 170
Contingency Reserve Process Theory Plan Risk Management Risk Management Plan Risk List / Description Identify Risks Risk Description / Probability / Impact Matrix Perform Qualitative Risk Analysis Planning Process Risk Description / Probability / Impact / Amount Perform Quantitative Risk Analysis Risk Resister(Updates)
Budget & Schedule activity for
Plan Risk Responses Monitor & Control Risks Estimate Costs
PMBOK Guide, Risk Management Process
Management Reserve Process Theory Risk Resister
Budget & Schedule activity
Scope Baseline Project Schedule Human Resource Plan Basis of Estimates Estimate Costs Planning Process Determine Budget Cost Performance Baseline Project Funding Requirement
Contingency Reserve Management Reserve Cost Point Estimate or Sum of Most likely WBS Element Costs Confident level 70% Unallocated Future Expense(UFE)
Allocating “Risk Dollars” Back to Individual Cost Elements – Stephen A. Book Literature Review WBS-Element Triangular Cost Distribution Merge WBS-Element Cost Distribution Probability A. Most Likely Total Cost Most likely + Confident Level (70%) B. + Cost UFE C. Point Estimate or Sum of Most likely WBS Element Costs + To be allocated in proportion to their Riskiness.
Summary of Literature Review Literature Review WBS Elements Tree Point Estimate
NoCases to use both Contingency and Management Reserve.
Use Management Reserve only
Use Three Point Estimate ?
- Never Use 63% (37/59) - Occasionally use 37% (22/59)
Use Monte Carlos Simulation (Crystal Ball or @Risk) ?
- Never use 86% (51/59) - Occasionally use 14% (8/59)
Case Study Case Study “ Construction Project for Production Base in Vietnam” Developed by D Construction Co. Ltd.
WBS Case Study Project Electrical Works PM Civil Works Mechanical Works Architecture Works # 1. On-Shore Works # 3.Power Plant # 6. Facilities # 8. Electric Equipments # 2. Off-Shore Works # 4.Utilities House # 7. Machines # 9 Cabling # 5. Main Office PM Omit PM for easy calculation of the budget
Case Study - Select Base Estimated Cost Case Study
Example : “Case Study” Project
Assumption : Base Estimate Cost 1,250 does not include contingency (but include