PragmaRisk uses Palisade’s DecisionTools Suite to Determine and Monitor Contingency Funds for Construction Projects

PragmaRisk (http://www.pragmarisk.fr/), a French risk management consultancy, uses Palisade’s risk and decision analysis software, the DecisionTools Suite to help identify the contingency funds potentially required to mitigate identified risk for construction projects.

Contingency recommendation and monitoring accounts for the many uncertainties when planning budgets in order to determine the amount of contingency fund that should be added to the original budget, or to check whether what has been allowed to date is enough. PragmaRisk performs integrated cost and schedule quantitative risk assessment (QRA) using @RISK (part of the DecisionTools Suite) throughout the life of a project, which can run over several years.

For most projects, PragmaRisk models the risks related to the budget and schedule overrunning, taking this integrated approach because cost and time are interdependent, and result in the most indirect costs.

Running a Cost and Schedule Integrated QRA using @RISK, PragmaRisk typically first identifies the probability of meeting the estimated budget if there is no contingency fund. This will depend on how the budget has been calculated, with factors such as estimator practices, company culture and the aggressiveness of assumptions influencing the figure.

The amount of contingency selected for the project will depend on its risk profile, but also on the contractor’s 'risk appetite'. Using a Monte Carlo approach does not predict what will actually happen, but it applies reasoning under conditions of risk and uncertainty so that these two key aspects to be distinguished.

The main uncertainties and risks affecting the budget of the project are then outlined. This allows mitigating action to be taken to reduce risks where possible. It also provides a complementary view to the usual ‘Top Risks’ identified by qualitative risk analysis. This increased coherence between qualitative and quantitative risk management provides a wider view of the project and related risks.

In some circumstances, for example if time or the resources available are limited, or for projects undertaken by small to medium sized companies, Monte Carlo risk analysis is usually not feasible because no dedicated resource or risk manager is available. In these instances, PragmaRisk uses Palisade’s StatTools (another component of the DecisionTools Suite) to analyse the historical data for portfolio projects and produce typical overruns / contingency consumption curves in line with a project’s specific risk profile.

Qualitative risk management uses a scoring mechanism to profile projects based on key risk drivers. These include the country where it is to be carried out and the context in which the client operates there, contractual and financial terms, complexity and technology challenges, the basis of the estimate / proposal preparation (for example, whether the contractor has had enough time to research constituent costs), the aggressiveness of cost and schedule assumptions, execution plan sourcing and subcontracting constraints.

The completed risk profile highlights areas on which to focus and the risks to be mitigated.

Bruno Berroyer, the founder of PragmaRisk, is an experienced risk manager. He has used other Monte Carlo software, but prefers @RISK. He explains: “Overall, Palisade’s DecisionTools is exactly that – a ‘toolbox’ that enables advanced risk analysis. Widely used around the world, Palisade’s software is well-maintained and supported, which means we can introduce risk analysis to our clients who have never undertaken QRA, or have had poor experiences in the past. Even for clients that use ERPs (enterprise resource planning software) rather than Excel, Palisade Custom Development can also deliver.”