A simple approach to contingency drawdown, presented by Ben Fry, 10th Oct 2016, APM North West branch conference

making the difference

A simple approach to contingency drawdownBen Fry

10 October 2016

Turner & Townsend A simple approach to contingency drawdown 2

The presenter

Ben Fry MEng MAPM■ Worked in Project Controls for the past 13

years (specialising in risk).

■ Primarily operating in defence, having worked in;■ Submarines ■ Maritime■ Air■ Land■ Logistics domains

■ Currently working as a Risk Manager on the Hinkley Point C Project (£18bn).


Turner & Townsend

97offices

130countries

Client Chester ZooProject Islands projectServices Cost managementValue GBP 40m

Client Heathrow Airport LimitedProject VariousServices Programme managementValue GBP 1bn per yearClient TranscendProject CrossrailServices Cost estimatingValue GBP 15bn

Client EDFProject Hinckley

Point CServices Project controlsValue GBP 16bn

“Turner & Townsend is an independent professional services company

specialising in programme management, project management, cost management

and consulting across the property, infrastructure and natural resources

sectors.”


What is contingency?

“Resource set aside for responding to identified risks.” APM: Contingency

“A sum of money held as an overall contingency to cover the cost impact of some unexpected event.” APM: Management Reserve

“A provision for a possible event or circumstance.” Google: Contingency

For the most of this presentation are using the Google definition above;

■ We are not distinguishing between Contingency and Management Reserve.■ The principles underpinning the drawdown of MR and Contingency are broadly the

same although the authority for the drawdown may be different.


Forecast vs. Drawdown

Forecast

Updated regularly to determine current risk exposure.

Reflects changes in circumstance and mitigation actions being completed.

Changes to assessments.

Doesn’t update the project baselines.

Drawdown

Happens when a risk has occurred and the baseline needs to be changed.

Based on actual (rather than potential) events.


What is contingency drawdown?

“The removal of funds from an agreed source resulting in a reduction of available funds.” APM: Drawdown

“The transfer of provision from a contingency budget into the Baseline or, the realisation of a benefit to the sponsor”

Baseline

Contingency

Benefit

Provision allocated to activities.

Contingency Provision.

Profit, reduced costs, early delivery or improved output performance. Transfer – Budget Release

Transfer –Budget Transfer


Features of a good contingency drawdown approach

■ Allows the controlled and visible drawdown of contingency into the baseline (or into benefit).

■ Ensures accountability/authority for the drawdown of contingency.

■ Provides and audit trail for the drawdown of contingency.

■ Should be fully integrated into other project controls processes.

■ Should fully consider all impacts associated with the drawdown engaging all stakeholders as applicable.

■ Should be simple, clear and easy to follow, requiring minimal resources to implement.

“Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things.Isaac Newton


Types of contingency

Cost

Time Performance



Cost

Time Performance


When would we drawdown cost contingency?

Sources of drawdown■ When a known risk has been realised;■ When a reasonable, unforeseen event occurs;■ When an additional funded mitigation has been approved;■ When there is sufficient confidence that risk exposure has reduced.


A cost contingency approach (process)

Control Account Budgets

Contingency Budget

Profit

Risk Event Occurs

Management Plan

(Issue)

Execute Change Process

Update Budgets

Control Account Budgets

Contingency Budget

Profit

Should:• Prioritise the issue. • Seek to establish and agree the

approach to be taken.• Might involve further

development of fallback plan.

Should:• Use the project’s standard change

management process. • Consider all budgets that have been

impacted by the risk. • Have clearly defined accountability for

approving the change.


Pitfalls of cost contingency drawdown

• Management may try to reduce the contingency budget to meet targets.

• As contingency isn’t allocated to a specific task is can seem tempting to reduce.

• Removing the budget doesn’t change the risk exposure.

“I want a 10% reduction in project costs”

• Often new/changed scope is required by the sponsor.

• This is not a risk and was not considered when the contingency was agreed.

• Scope changes should be provided with an associated budget.

“The vehicle needs to go 10mph faster”

Early profit realisation / cost saving New scope


Pitfalls of cost contingency drawdown

• Control Accounts may be forecasting over-budget due to under performance.

• A reasonable amount of uncertainty should be included in the CA budgets.

• Underperformance doesn’t change the risk exposure.

“Things have costed more than planned”

UnderperformanceMost of these pitfalls are consistent with a normal Earned Value (EV) methodology.

Establish early what constitutes an acceptable drawdown of the contingency budget.


Giving up contingency

Linear Profile

Year 1 Year 2 Year 3 Year 4 Year 5£1m £1m £1m £1m £1m

• Very simple to calculate.

• Sets the expectation for the contingency release on an annual basis.

• Doesn’t relate to when the risk events will occur.

• Can result in a lack of contingency (or holding onto contingency for too long).

£3m Risk OccursBudget has been released



Impact Points Profile (Waterfall)

Time

Risk A End of Exposure

EMV = £1M

Risk B End of Exposure

EMV = £1M

Risk C End of Exposure

EMV = £1M

Risk D End of Exposure

EMV = £1MExposure (£M)

Time

4

3

2

1



Impact Points Profile (Waterfall)

• Fairly simple to calculate.

• Relates to when in time a risk can occur.

• Setting out a waterfall up front, doesn’t represent risks that are identified throughout the project.

• Approach relies on being able to attribute an exposure value to a single risk event e.g. Expected Monetary Value (EMV).

Exposure (£M)

Time



Cost Risk Analysis Review (Recommended)

Cost

Confidence

• More complex to calculate.

• Requires commitment from the business to re-run cost risk analysis regularly and use this to determine release of contingency;• Key Milestones• Annually

• Reflects any changes in the risks that occur between updates.

Original Approval @ 50% - £1M

1 year later @ 50% - £800k

1 year later: Spent £50k on

risks arisingRelease £150k to

the business



Cost

Time Performance


What is schedule contingency?

Activity A

Activity BActivity C

Milestone(Deterministic)

Schedule ContingencyMilestone

(Contract/Reported)


A schedule contingency approach

Control Account

Schedules

Schedule Contingency

Early Delivery

Risk Event Occurs

Management Plan

(Issue)


Update Schedule

Control Account

Schedules

Schedule Contingency

Early Delivery





management process. • Consider impact of schedule on costs. • Have clearly defined accountability for



Pitfalls of schedule contingency

Schedule Contingency Pitfalls

Underperformance Scope Changes

Pressures for Early Delivery



Cost

Time Performance


What could performance contingency look like?

Product

Speed Noise

Acceleration Comfort

70 mphMinimum

250 mphDesirable

100 mphTarget

10.6sMinimum

4sDesirable

8.9sTarget

2HzDesirable

10HzTarget

15HzMinimum

70DbMinimum

65DbTarget

60DbDesirable


Key Requirement Features

■ Limit the number of critical requirements for your project. ■ Key requirements should be specific & measureable. ■ Often this information will be managed by engineering anyway (as engineering

tolerances), but linking it to risk or contingency budgets is not always common practice.

■ The establishment of the key requirements (and therefore performance contingency) will depend on your contracting arrangement;■ May be possible to agree these with the client.■ You could take an internal view on what a client would be willing to agree as a

concession.■ You could specify requirements higher than your contract to establish a contingency in

design or the supply chain.


Performance Contingency

Minimum Key Requirement


Planned Performancee.g. 100 mph

Minimum Performancee.g. 70 mph



Risk Occurs

Reduced Performance


Proposed approach to performance contingency



Risk Event Occurs

Management Plan

(Issue)


Update MarginMinimum Key Requirement






management process. • Consider impact of performance on

schedule and costs. • Have clearly defined accountability for


Reduced Performance


Pitfalls of performance contingency

Schedule Contingency Pitfalls

Underperformance Scope Change

Better Performance


Summary

■ Contingency budgets can be defined to cover schedule delay and performance margins as well as cost.

■ Consideration should be given monitoring/controlling all 3 “types” of contingency budget.

■ Make use of existing processes (specifically the change process);■ This defines levels of authority for approving contingency drawdown.■ Considers all aspects of the change integrating time, cost and performance. ■ Provides a joined up approach to contingency drawdown with minimal extra effort.

■ The pitfalls associated with contingency drawdown are the same irrespective of the type of contingency;■ Scope change.■ Under-performance.■ Better performance.

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A simple approach to contingency drawdown, presented by Ben Fry, 10th Oct 2016, APM North West branch conference