Project flexibility: Contingencies as a response to uncertainties

Abstract

The thesis analyses flexibility in cost estimates of large investments projects. Cost contingency and reduction lists are two approaches of providing flexibility in project budgets. Here the total flexibility provided at project front-end is quantified by adding cost contingency and reduction lists. Mainly it is an empirical study of 90 projects which is carried out to describe quantification of provided flexibility in response to uncertainty and correlation between flexibility and uncertainty in project cost estimates.Qualitative data collected from the interviews has supported the analyses of the problem. It also quality assured the quantitative results.Generally uncertainties are related to every aspect of a project throughout its life cycle. On the other hand projects are allocated with budgets on front-end. Therefore cost estimates are needed to be flexible enough to accommodate any changes caused by inherent uncertainties during the project implementation. For this purpose, cost contingency is included in the project budgets. It may be seen as an approach of providing flexibility in cost estimates for managing future uncertainties. Another way of providing flexibility is the use of reduction lists. Reduction lists are practiced in Quality-at-entry regime of Norway. These are the prepared scope changes at front-end to take decision on certain scope elements which may be left out ofthe project scope in case of cost overrun.As expected, there is a strong correlation between flexibility and uncertainty. More uncertainty requires more flexibility but to a certain extent. As uncertainty and complexity increases, more efficient solutions are required for managing the projects. According to the opinion of interviewees, cost effectiveness of the projects may be increased and the efficiency is preserved if the projects are provided with proper amountof flexibility in the front-end phase. On the other hand, management should also use other modernapproaches in case of increased uncertainty and complexity. Finally, the findings are discussed in the perspective of project categorization models and project complexity. The thesis uses the experiences of Quality-at-entry regime of Norway and explains the variations of flexibility in the context of discussion.Comparison of similar type of study in other governance frameworks for public projects being followed in other countries, for instance UK, is an interesting area for future research.