Key Factors for Risk Contingency for P80 vs P90

1. Introduction

Deciding project contingency is very critical factor in risk management of any project which ensures a project remains on track even when unexpected challenges arise. Contingency levels like P80 and P90 are statistical measures used to quantify the amount of contingency required to cover potential risks and uncertainties in a project.

These levels correspond to the probability that the project cost will not exceed a certain value. Choosing the appropriate contingency level is crucial for balancing risk and cost, particularly in complex projects.

2. What is P80 and P90 Contingency Levels

P80 and P90 are terms used in project risk management to describe specific confidence levels for cost estimates.

• P80 implies an 80% confidence level, meaning there is an 80% chance that the project cost will not exceed the estimated amount.
• P90 implies an 90% confidence level, meaning there is an 90% chance that the project cost will not exceed the estimated amount.

These levels are determined through risk analysis techniques like Monte Carlo simulations, which model a range of possible outcomes to determine the probability of different cost scenarios.

The calculation of P80 and P90 typically involves performing a Monte Carlo simulation, where thousands of potential project outcomes are simulated based on the identified risks. The cost distribution resulting from these simulations allows project managers to identify the cost at which they can be 80% or 90% confident the project will not exceed. This method provides a data-driven approach to determining the appropriate level of contingency.

P80 and P90 are essential aspects in managing project risk, particularly in large and complex projects where uncertainties are significant. By choosing an appropriate contingency level, project managers can mitigate the impact of unexpected events, ensuring that the project stays within budget and on schedule.

3. Advantages and Disadvantages of P80 and P90

4. Key Factors Influencing the Choice Between P80 and P90

The decision to use P80 or P90 depends on several factors, including the nature of the project, the risk appetite of stakeholders, cost implications, and time sensitivity. These factors must be carefully considered to determine the most appropriate level of contingency.

4.1 Project Type and Complexity

Projects with high complexity and uncertainty, such as infrastructure projects typically require a higher level of contingency. P90 might be more suitable in these cases to account for the numerous unknowns and potential delays.

4.2 Stakeholder Risk Appetite

Different stakeholders have varying levels of risk tolerance. For example, a government-owned company may prefer P90 to minimize the risk of budget overruns, while a private company with higher risk tolerance might opt for P80 to reduce initial costs.

4.3 Cost Implications

Higher contingencies, like P90, lead to increased project costs, which can be a deciding factor. If budget constraints are tight, P80 might be chosen to allocate fewer resources to contingency, allowing more funds for other project needs.

4.4 Time Sensitivity

Projects that are extremely time-sensitive may benefit from the use of P90, as this level of contingency reduces the risk of delays due to unforeseen issues. In contrast, less time-sensitive projects might opt for P80 to strike a balance.

5. Stakeholder Considerations

5.1 Owner Company / Employer

Government-Owned vs. Private Company

The ownership of the employer plays a significant role in contingency planning. Government-owned companies often have a lower risk tolerance, leading them to favor P90 to avoid political repercussions of budget overruns. Private companies, especially those with shareholders, might prefer P80 to maximize profitability while still managing risk.

Risk Tolerance and Political Considerations

Political factors, such as the stability of the government or public sentiment towards the project, can also influence the choice between P80 and P90. In politically sensitive projects, P90 might be preferred to mitigate the risk of cost overruns that could lead to public or governmental backlash.

Long-term vs. Short-term Objectives

For long-term projects, particularly those with strategic importance , P90 may be chosen to ensure the project remains viable over its lifespan. Short-term projects or those with tight profit margins may lean towards P80 to optimize immediate financial outcomes.

5.2 Contractor

Risk Allocation and Contractual Obligations

Contractors often have to balance risk and reward. In fixed-price contracts, contractors may prefer P90 to protect against cost overruns that they would have to absorb.

Conversely, in cost-plus contracts, where the client bears the financial risk, P80 might be sufficient.

Profit Margins and Contingency Planning

The contractor's profit margins also play a role in deciding the level of contingency. Higher margins may allow for the use of P80, as the contractor can absorb some risks, while lower margins may necessitate P90 to protect profitability.

6. Impact of Political and Social Factors

Political and social factors can significantly influence the choice between P80 and P90, particularly in large infrastructure projects . Political stability, government policies, and public perception all contribute to the risk environment of a project.

6.1 Political Stability and Government Policy

In regions with unstable political environments or where government policies frequently change, a higher contingency level like P90 may be preferred. This approach helps to buffer the project against potential disruptions caused by political shifts, regulatory changes, or public opposition.

6.2 Social Considerations and Public Perception

Public perception and social factors can also dictate the level of contingency. For projects that are subject to public scrutiny, such as those with environmental implications, P90 might be chosen to avoid cost overruns that could lead to public outcry or loss of support. On the other hand, projects with less social impact might operate with P80.

7. When to Use P80 vs. P90

There is no right or wrong here. The decision to use P80 or P90 should be guided by a thorough understanding of the project’s risk profile, stakeholder preferences, and external factors. For example, projects with high complexity and significant environmental and political considerations, P90 might be the safer choice.

However, for projects with well-understood risks and tight budget constraints, P80 may provide a more balanced approach.

8. Conclusion

Choosing the appropriate level of contingency in project risk management is a nuanced decision that requires careful consideration of multiple factors. P80 and P90 offer different levels of protection against cost overruns, and the decision to use one over the other should be informed by the nature of the project, the risk tolerance of the stakeholders, and the external environment. In high-risk projects like infrastructure projects, P90 may often be the preferred choice, while P80 might be more suitable for less complex projects or those with stringent budget constraints.