Thought Leadership

Predict the Future! Effectively Quantifying Risk for Megaprojects

Category: Thought Leadership
N. Ryan Smith • November 6, 2017

Developing contingency and management reserves for a complex project, a megaproject, or a mega-program is undoubtedly a daunting task.

There are so many variables at play – organizational risk tolerance, past project successes and failures, and whether or not the term itself, “contingency,” is considered a four-letter word in the judgment of whatever audience you are trying to influence.

Where do you even start?

Depending on who you ask, good contingency fund development practice can range from elaborate probabilistic modelling to simple assignment of percentages. While these approaches have varying degrees of merit, establishing a prudent and defendable contingency that becomes the foundation for good contingency fund management requires the more detailed approach.

Fortunately, it doesn’t have to involve throwing guesses out and hoping they stand the test of time. It has been my experience that good contingency fund planning depends on two pillars:

Basis and Education

Contingency planning will never compensate for inadequate front-end project planning. If you do not have a rock-solid scope, a rock-solid schedule, and a rock-solid estimate that is then informed by a rock-solid risk register, you do not have basis for a prudent and defensible contingency estimate. Internal and external stakeholders will see through it:

“Sir/Madam Project Manager, it is clear your contingency slush fund is a compensator for an inadequate project plan.”

Trying to argue against their point is an uphill battle and can impact your credibility. And believe me, while it is not always well understood in executive circles, the magic of Monte Carlo will not save you!

Once you have a strong basis in your project plan underpinned by best practices and lessons learned, you can have confidence that the risks and uncertainties you are modelling are true and unbiased. This is where you have the power and can objectively communicate upwards, sideways and across the organization that the contingency fund you are proposing is prudent.

While doing so, you need to educate the decision makers on what the contingency model is and – just as importantly – what it isn’t. There are no guarantees, of course, and the model is only as good as the quality and basis of the risks and uncertainties you have loaded within it.

Tell the decision makers how it works, how to use the information, what a confidence level is and what it means. Peel back the curtain. Keep in mind that, the more complex or elaborate the model, the more difficult it is to explain to the decision makers, and if they can’t explain it in practical terms to the people they answer to, they will never endorse it. You want to strike balance and strive for a robust model that is simple but effective for any size of project.

Done correctly, contingency modeling can help eliminate emotion and bias from the process and bring order from chaos for even the largest projects.