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(RISK-2795) Project Risk Drawdown – A Structured Approach to Contingency Management

The most common approach to contingency management is contingency drawdown, i.e. reduction of contingency funds through financing realized risks. With this approach, correlation between remaining contingency and actual identified project risks is weak (risks are dynamic, contingency is quasi-static – the only changes are through drawdown.) This approach does not encourage project teams to efficiently manage project budgets, as it promotes the use of contingency as a slush fund to subsidize any underperforming project areas, instead of addressing actual execution inefficiencies.

This paper describes a structured approach to dynamically adjust contingencies based on periodic quantification of all identified and active project risks. The proposed methodology uses a Risk Drawdown Curve (RDC) representing a time-trend of the magnitude of all outstanding project risks at given probability levels. The RDC is forward-looking whereas the current practice of contingency drawdown is back-looking into the project’s history. The RDC enables strong correlation between available project contingency and the value of all remaining project risks. As a result, cost and current schedule updates during execution always accurately reflect remaining project uncertainties.