Risk management and contingency sum of construction projects

Terence Yat Ming Lam*, Njavwa Siwingwa

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

21 Citations (Scopus)

Abstract

Purpose – Most organisations do not have established guidelines for the estimation and management of contingency funds. The purpose of this paper is to identify the risk factors at the construction phase causing project cost overruns, and a reliable method for the estimation of contingency sum is established.

Design/methodology/approach – Combined qualitative–quantitative exploratory methods were used. Qualitative interviews were conducted with five expert practitioners working in a Public Works Department in Zambia to determine how contingency sum is estimated and to explore what risk factors should be
considered. Quantitative regression used cost and risk data collected from 30 recently completed building and refurbishment projects.

Findings – The qualitative study indicated that the project budget overruns constitute a major issue. This finding is in line with the paired-samples t-test results which show that the difference between the total variations and the initial contingency sum tends to be significant. The regression analysis proved that the
contingency sum was positively correlated to the estimated contract sum. The qualitative interview results and Pearson correlation analysis also showed that contingency sum and project complexity tend to have a significant correlation. The research also demonstrates that the type of works is not a direct significant factor.

Research limitations/implications – Because the projects used for the study were relatively short, duration of the project and economic factor of tax rate, exchange rate and inflation rate were not examined in the multiple regression analysis. Further studies should be conducted on longer projects to test out whether
these risk factors are significant in influencing the project contingency.

Practical implications – The results demonstrate that the multiple regression method can be applied as a reliable tool to predict contingency sums. Accurate contingency sums and project budget estimates benefit construction clients and their project managers. Individual project conditions should be carefully examined
when assessing the contingency.

Originality/value – This research establishes a reliable regression method for the assessment of the contingency for the pre-tender estimate which has significant impact on the project feasibility and cost control, using related risk factors involved in construction contingency and client’s contingency.

Original languageEnglish
Pages (from-to)237-251
Number of pages15
JournalJournal of Financial Management of Property and Construction
Volume22
Issue number3
DOIs
Publication statusPublished - 2017

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