A simple approach to contingency drawdown Presented by Ben Fry Monday 10th October 2016 APM North West branch and Risk SIG conference Alderley Park, Macclesfield

1. making the difference
A simple approach to
contingency drawdown
Ben Fry
10 October 2016

2. Turner & Townsend
The presenter
Ben Fry MEng MAPM
■ Worked in Project Controls for the past 13
years (specialising in risk).
■ Primarily operating in defence, having worked
in;
■ Submarines
■ Maritime
■ Air
■ Land
■ Logistics domains
■ Currently working as a Risk Manager on the
Hinkley Point C Project (£18bn).
2A simple approach to contingency drawdown

3. Turner & Townsend
Turner & Townsend
3A simple approach to contingency drawdown
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4. Turner & Townsend
What is contingency?
“Resource set aside for responding to identified risks.” APM: Contingency
“A sum of money held as an overall contingency to cover the cost
impact of some unexpected event.” APM: Management Reserve
“A provision for a possible event or circumstance.” Google: Contingency
For the most of this presentation are using the Google definition above;
■ We are not distinguishing between Contingency and Management Reserve.
■ The principles underpinning the drawdown of MR and Contingency are broadly the
same although the authority for the drawdown may be different.
4A simple approach to contingency drawdown

5. Turner & Townsend
Forecast vs. Drawdown
A simple approach to contingency drawdown 5
Forecast
Updated regularly to determine current
risk exposure.
Reflects changes in circumstance and
mitigation actions being completed.
Changes to assessments.
Doesn’t update the project baselines.
Drawdown
Happens when a risk has occurred and the
baseline needs to be changed.
Based on actual (rather than potential)
events.

6. Turner & Townsend
What is contingency drawdown?
“The removal of funds from an agreed source resulting in a
reduction of available funds.” APM: Drawdown
“The transfer of provision from a contingency budget into the
Baseline or, the realisation of a benefit to the sponsor”
6A simple approach to contingency drawdown
Baseline
Contingency
Benefit
Provision allocated to activities.
Contingency Provision.
Profit, reduced costs, early
delivery or improved output
performance. Transfer – Budget Release
Transfer –Budget Transfer

7. Turner & Townsend
Features of a good contingency
drawdown approach
■ Allows the controlled and visible
drawdown of contingency into the
baseline (or into benefit).
■ Ensures accountability/authority for the
drawdown of contingency.
■ Provides and audit trail for the
drawdown of contingency.
■ Should be fully integrated into other
project controls processes.
■ Should fully consider all impacts
associated with the drawdown engaging
all stakeholders as applicable.
■ Should be simple, clear and easy to
follow, requiring minimal resources to
implement.
A simple approach to contingency drawdown 7
“Truth is ever to be
found in simplicity,
and not in the
multiplicity and
confusion of things.
Isaac Newton

8. Turner & Townsend
Types of contingency
A simple approach to contingency drawdown 8
Cost
Time Performance

9. Turner & Townsend
Types of contingency
A simple approach to contingency drawdown 9
Cost
Time Performance

10. Turner & Townsend
When would we drawdown cost
contingency?
Sources of drawdown
■ When a known risk has been realised;
■ When a reasonable, unforeseen event occurs;
■ When an additional funded mitigation has been approved;
■ When there is sufficient confidence that risk exposure has reduced.
10A simple approach to contingency drawdown

11. Turner & Townsend
A cost contingency approach (process)
11A simple approach to contingency drawdown
Control
Account
Budgets
Contingency
Budget
Profit
Risk Event
Occurs
Management
Plan
(Issue)
Execute
Change
Process
Update
Budgets
Control
Account
Budgets
Contingency
Budget
Profit
Should:
• Prioritise the issue.
• Seek to establish and agree the
approach to be taken.
• Might involve further
development of fallback plan.
Should:
• Use the project’s standard change
management process.
• Consider all budgets that have been
impacted by the risk.
• Have clearly defined accountability for
approving the change.

12. Turner & Townsend
Pitfalls of cost contingency drawdown
• Management may try to
reduce the contingency
budget to meet targets.
• As contingency isn’t
allocated to a specific task is
can seem tempting to
reduce.
• Removing the budget doesn’t
change the risk exposure.
“I want a 10% reduction in
project costs”
• Often new/changed scope is
required by the sponsor.
• This is not a risk and was not
considered when the
contingency was agreed.
• Scope changes should be
provided with an associated
budget.
“The vehicle needs to go
10mph faster”
A simple approach to contingency drawdown 12
Early profit realisation /
cost saving
New scope

13. Turner & Townsend
Pitfalls of cost contingency drawdown
• Control Accounts may be
forecasting over-budget due
to under performance.
• A reasonable amount of
uncertainty should be
included in the CA budgets.
• Underperformance doesn’t
change the risk exposure.
“Things have costed more than
planned”
A simple approach to contingency drawdown 13
Underperformance
Most of these pitfalls are consistent with a
normal Earned Value (EV) methodology.
Establish early what constitutes an
acceptable drawdown of the
contingency budget.

14. Turner & Townsend
Giving up contingency
Linear Profile
14A simple approach to contingency drawdown
Year 1 Year 2 Year 3 Year 4 Year 5
£1m £1m £1m £1m £1m
• Very simple to calculate.
• Sets the expectation for the contingency release on an annual basis.
• Doesn’t relate to when the risk events will occur.
• Can result in a lack of contingency (or holding onto contingency for
too long).
£3m Risk
Occurs
Budget has been released

15. Turner & Townsend
Giving up contingency
Impact Points Profile (Waterfall)
15A simple approach to contingency drawdown
Time
Risk A End of
Exposure
EMV = £1M
Risk B End of
Exposure
EMV = £1M
Risk C End of
Exposure
EMV = £1M
Risk D End of
Exposure
EMV = £1MExposure
(£M)
Time
4
3
2
1

16. Turner & Townsend
Giving up contingency
Impact Points Profile (Waterfall)
16A simple approach to contingency drawdown
• Fairly simple to calculate.
• Relates to when in time a risk can occur.
• Setting out a waterfall up front, doesn’t represent risks that are
identified throughout the project.
• Approach relies on being able to attribute an exposure value to a
single risk event e.g. Expected Monetary Value (EMV).
Exposure
(£M)
Time

17. Turner & Townsend
Giving up contingency
Cost Risk Analysis Review (Recommended)
17A simple approach to contingency drawdown
Cost
Confidence
• More complex to calculate.
• Requires commitment from the business to re-run cost risk analysis
regularly and use this to determine release of contingency;
• Key Milestones
• Annually
• Reflects any changes in the risks that occur between updates.
Original Approval
@ 50% - £1M
1 year later @
50% - £800k
1 year later:
Spent £50k on
risks arising
Release £150k to
the business

18. Turner & Townsend
Types of contingency
A simple approach to contingency drawdown 18
Cost
Time Performance

19. Turner & Townsend
What is schedule contingency?
19A simple approach to contingency drawdown
Activity A
Activity B
Activity C
Milestone
(Deterministic)
Schedule Contingency
Milestone
(Contract/Reported)

20. Turner & Townsend
A schedule contingency approach
20A simple approach to contingency drawdown
Control
Account
Schedules
Schedule
Contingency
Early
Delivery
Risk Event
Occurs
Management
Plan
(Issue)
Execute
Change
Process
Update
Schedule
Control
Account
Schedules
Schedule
Contingency
Early
Delivery
Should:
• Prioritise the issue.
• Seek to establish and agree the
approach to be taken.
• Might involve further
development of fallback plan.
Should:
• Use the project’s standard change
management process.
• Consider impact of schedule on costs.
• Have clearly defined accountability for
approving the change.

21. Turner & Townsend
Pitfalls of schedule contingency
A simple approach to contingency drawdown 21
Schedule
Contingency Pitfalls
Underperformance Scope Changes
Pressures for Early
Delivery

22. Turner & Townsend
Types of contingency
A simple approach to contingency drawdown 22
Cost
Time Performance

23. Turner & Townsend
What could performance contingency
look like?
A simple approach to contingency drawdown 23
Product
Speed Noise
Acceleration Comfort
70 mph
Minimum
250 mph
Desirable
100 mph
Target
10.6s
Minimum
4s
Desirable
8.9s
Target
2Hz
Desirable
10Hz
Target
15Hz
Minimum
70Db
Minimum
65Db
Target
60Db
Desirable

24. Turner & Townsend
Key Requirement Features
■ Limit the number of critical requirements for your project.
■ Key requirements should be specific & measureable.
■ Often this information will be managed by engineering anyway (as engineering
tolerances), but linking it to risk or contingency budgets is not always common
practice.
■ The establishment of the key requirements (and therefore performance contingency)
will depend on your contracting arrangement;
■ May be possible to agree these with the client.
■ You could take an internal view on what a client would be willing to agree as a
concession.
■ You could specify requirements higher than your contract to establish a contingency in
design or the supply chain.
A simple approach to contingency drawdown 24

25. Turner & Townsend
Performance Contingency
A simple approach to contingency drawdown 25
Minimum Key
Requirement
Performance
Contingency
Planned
Performance
e.g. 100 mph
Minimum Performance
e.g. 70 mph
Minimum Key
Requirement
Performance
Contingency
Risk Occurs
Reduced
Performance

26. Turner & Townsend
Proposed approach to performance
contingency
A simple approach to contingency drawdown 26
Minimum Key
Requirement
Performance
Contingency
Risk Event
Occurs
Management
Plan
(Issue)
Execute
Change
Process
Update Margin
Minimum Key
Requirement
Performance
Contingency
Should:
• Prioritise the issue.
• Seek to establish and agree the
approach to be taken.
• Might involve further
development of fallback plan.
Should:
• Use the project’s standard change
management process.
• Consider impact of performance on
schedule and costs.
• Have clearly defined accountability for
approving the change.
Reduced
Performance

27. Turner & Townsend
Pitfalls of performance contingency
A simple approach to contingency drawdown 27
Schedule
Contingency Pitfalls
Underperformance Scope Change
Better Performance

28. Turner & Townsend
Summary
A simple approach to contingency drawdown 28
■ Contingency budgets can be defined to cover schedule delay and performance
margins as well as cost.
■ Consideration should be given monitoring/controlling all 3 “types” of contingency
budget.
■ Make use of existing processes (specifically the change process);
■ This defines levels of authority for approving contingency drawdown.
■ Considers all aspects of the change integrating time, cost and performance.
■ Provides a joined up approach to contingency drawdown with minimal extra effort.
■ The pitfalls associated with contingency drawdown are the same irrespective of the
type of contingency;
■ Scope change.
■ Under-performance.
■ Better performance.

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Tower Hill
Bristol
BS2 0JA
t: +44 (0) 117 922 7300
e: Ben.Fry@Turntown.co.uk
www.turnerandtownsend.com
29
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