Risk buffering (or risk hedging) is the creation of some reserve or buffer that can absorb the effects of the many accepted risks without jeopardizing the project’s successful delivery. Project contingency or buffering can also include the allocation of additional time for the project’s completion. Nevertheless, the risk that those organizations could face and many times not accounted for, is the risk of falling short when it comes to consuming costs and schedule buffer during the project’s execution. A Project Management Information System (PMIS) is needed to manage, monitor, evaluate and report project contingency drawdown.
Quantifying the Right Cost and Schedule Buffer
Regardless of who is managing the projects, there will be always a needed date to finish the project on time and within the approved budget. To start with, we need to have a correct and realistic integrated project schedule that is linked to the project budget. The project schedule which will be detailed to the desired control level will be modified to include all risk response actions that relate to avoidance, mitigation, and transfer of risks. In other words, it will only be used to analyze the risk uncertainties that the organization responsible for the project delivery has to accept and cannot be mitigated. For each activity, we need to determine the pessimistic (worse), most likely, and optimistic (best) duration to execute the activity and budget to deliver the associated scope of work. The schedule will also include all risk events that cannot be avoided, mitigated, or transferred.
Using a Monte Carlo simulation tool like Safran Risk, Primavera Risk Analysis or Acumen Risk, the risk probability cumulative distribution curve will be generated. The organization needs to determine the confidence level that will enable setting the project’s target completion date and budget for delivering the project’s scope of work. Usually, this is set at an 80% confidence level where the difference between this 80% confidence level and 100% confidence level will be the cost and schedule buffer.
Freezing the Project’s Approved Execution Plan
PMWeb Project Management Information System (PMIS) will be used to capture the details of the approved 80% (or whatever selected percentage) confidence plan. PMWeb budget module will capture the approved budget and schedule the start date for the project’s execution plan. The budget will be aligned with the project WBS levels where the project will be controlled at. In addition, the project budget will include the contingency as a separate line item number, with the option to break down the overall contingency into more detailed controlled levels. Accordingly, the total of this approved budget will equal the 100% confidence level budget and project completion date. Similar to all PMWeb modules, documents can be uploaded and attached to the budget as well as relevant PMWeb records can be linked. In addition, a workflow will be assigned to formalize the steps for submitting, reviewing, and approving the project budget before it is used for managing the project’s contingency.
Managing the Consumption of Contingency and Buffer
At the end of each progress review period which could be weekly, bi-weekly or monthly, the total consumed buffer will be captured using the PMWeb budget request module. For each contingency or buffer usage, there will be a separate budget request form for which it will show the additional cost and schedule adjustment for the relevant project WBS level and the adjustment to the cost and schedule buffer for the same WBS level. The total sum value of each budget request will be always zero. Similar to all PMWeb modules, documents can be uploaded and attached to the budget requests as well as relevant PMWeb records can be linked. In addition, a workflow will be assigned to formalize the steps for submitting, reviewing, and approving the project budget before it is used for managing the consumption of the project’s contingency. PMWeb conditional workflow allows adding the different rules that are aligned with the approval authority levels set for the project.
Monitoring, Evaluating, and Reporting Cost Contingency and Schedule Buffer Status
The Cost and Schedule Buffer Status dashboard will be used to provide a real-time single version of the truth of a project buffer status. The dashboard will include a log of all budget adjustments that are related to buffer consumption, current cost, and schedule buffer consumed and available for each project stage.
In addition, another dashboard will be created to report on the Cost and Schedule Buffer Status for the complete projects portfolio of the organization. This will provide executive management with an understanding of the number of contingency funds consumed and blocked for each project. At this executive level, the organization might also consider the management reserve they have allocated to each project to address the impact of risks that cannot be managed at the project level.
Risk buffering is the creation of some reserve or buffer that can absorb the effects of the many business risks that construction project owners must accept without jeopardizing the project. Buffering can also include the allocation of additional time for the project’s completion. Nevertheless, the risk that those organizations could face and many times not accounted for, is the risk of falling short when it comes to consumption cost and schedule buffer during the project’s execution. A PMIS like PMWeb will be used to properly establish, monitor, evaluate and report contingency usage to reduce the risk of the project running out of money before the project is complete.
About the Author
Bassam Samman, PMP, PSP, EVP, GPM is a Senior Project Management Consultant with more than 35-year service record providing project management and control services to over 100 projects with a total value of over US $5 Billion. Those projects included Commercial, Residential, Education and Healthcare Buildings and Infrastructure, Entertainment and Shopping Malls, Oil and Gas Plants and Refineries, and Telecommunication and Information Technology projects. He is thoroughly experienced in complete project management including project management control systems, computerized project control software, claims analysis/prevention, risk analysis/management (contingency planning), design, supervision, training, and business development.
Bassam is a frequent speaker on topics relating to Project Management, Strategic Project Management, and Project Management Personal Skills. Over the past 35 years, he has lectured at more than 350 events and courses at different locations in the Middle East, North Africa, Europe, and South America. He has written more than 250 articles on project management and project management information systems that were featured in international and regional magazines and newspapers. He is a co-founder of the Project Management Institute- Arabian Gulf Chapter (PMI-AGC) and has served on its board of directors for more than 6 years. He is a certified Project Management Professional (PMP) from the Project Management Institute (PMI), a certified Planning and Scheduling Professional (PSP), and Earned Value Professional (EVP) from the American Association of Cost Engineers (AACE) and Green Project Management (GPM).
Bassam holds a Masters in Engineering Administration (Construction Management) with Faculty Commendation, George Washington University, Washington, D.C., USA, Bachelor in Civil Engineering – Kuwait University, Kuwait and has attended many executive management programs at Harvard Business School, Boston, USA and London Business School, London, UK.