Situations where the actual outcome of particular events or activities are likely to change from the estimate forecasted value are more often than not characterized by risk and uncertainties. The construction industry is prone to a lot of risk mainly because there are many uncertain variables that exist during the implementation of the project which affect the overall project duration and cost. Construction projects, especially those which are led by competitive bids are very risky by nature. (Garry D et al. 2010) There exist different construction delivery models but most of the highways projects in Canada and the United States are known to be carried out via the design-bid-build model also known as the traditional model. Which implies that the design is produced first before another procurement contract is tendered for the actual construction. More often than not the design-bid-build model has been associated with delayed completion periods and cost overruns.
Contingency amount is a value allowance used to cover the cost and time escalation that are experience due to different risk and uncertainties. The definition of contingency according to the Project Management Institute (PMI) goes as follows; ” The amount of funds, budget, or time needed above the estimate to reduce the risk of overruns of project objectives to a level acceptable to the organization.” Love et al (2015) differentiates between cost overruns which is a budget increase, cost increase, or cost growth, with cost escalation which defines anticipated growth in budgeted cost due to factors such as inflation. There exist various methods to estimate the contingency amount required for a highway project. Love et al (2015) uses goodness of fit test and determined that an effective way to determine contingency amount is by the use of logistic probability density function (PDF). On the other hands other alternatives methods could be applied a good example is via identification of different “risk drivers”. The identified risk drivers are obtained through surveys from professionals in the field of highway construction projects and a model called “step wise regression model” is used to analyze the relationships between risk drivers and predetermined cost contingency amounts obtained from surveyed project data. (Diab et al 2017)
The causes that lead to contract change can become main risk factors which could eventually lead to an increase in direct and indirect cost. It is difficult to assess risk because the assessment method is based on lump sum ratio application. (Jung et al. 2015) As a result of this explicit application of contingency theory to project management remain rare. However, there a fast growing notion of which all projects are more or less similar and that similarity impacts how they are managed. Contingency theories provide an implicit basis for the different approaches to projects of various types, provided that the different projects can be distinguished in terms of contingency factors. Contingency theories allows the possibility that different approaches may provide a better performance and hence better tackle the cost overruns experience during construction projects (Howell et al. 2010)
To conclude, there are many effective risk assessments techniques used to come up with contingency amounts. The effectiveness of the technique will be relative to the type of project to which it is applied which therefore implies that each risk assessment techniques treat projects as independent entities and does not categorize projects into subtypes from which detailed analyses can be made. Also, there has been little empirical research done that relates risk with cost overruns for certain types of highway projects. Highway projects use cost estimation models which consider construction risk as a function of a factors which influence the construction cost. A model that is established on these bases are usually used for individual contracts only rather project budgets. (Garry D et al 2010) According to Diab et al. (2015) the bulk of the influence on contingencies is experienced by the owner while the changes made upon owners request affect both the owner and the contractor’s contingency amount. In that light, empirical research needs to be carried out to assess where certain highway projects experience high cost overruns and the research needs to be focused on the Owner not the contractor with particular focus on overruns relating to the decision to build baseline budget. (Garry D et al 2010)