Risk Evaluation Committee CONTINGENCY, RISK & OTHER ALLOWANCES Presentation By: Adam Malkhassian October 2003

Risk Evaluation Committee Slide 2 Why do we need allowances anyway ? Not enough technical info. Not enough technical info. Not enough commercial info. Not enough commercial info. Ignorance of facts Ignorance of facts  Scope  Country  Taxation  Legal No time No time No budget No budget No manpower No manpower Fear / Panic / confusion Fear / Panic / confusion

Risk Evaluation Committee Slide 3 CONTINGENCY  An allowance to cover undefined items of work which will have to be performed or elements of cost which will be incurred within the defined scope of work of the estimate, that cannot be explicitly foreseen or described at the time the estimate is being made because of lack of complete accurate and detailed information.

Risk Evaluation Committee Slide 4 CONTINGENCY  Contingency reflects the measure of the level of uncertainties related to an established scope of work. It is an integral part of an estimate and should be applied (after careful analysis) to all parts of the estimates, i.e. direct costs, indirect costs, services costs, etc.  Any defined item (no matter how preliminary the information, data or design) should be covered by specific allowance and not by contingency.

Risk Evaluation Committee Slide 5 CONTINGENCY Known unknowns Known unknowns If we had enough data, enough time, enough manpower, we would have zero contingency. If we had enough data, enough time, enough manpower, we would have zero contingency. Contingency is the sum of all contingencies added to each section of the work. Contingency is the sum of all contingencies added to each section of the work. Analysis by section/ WBS, system, etc. Analysis by section/ WBS, system, etc. Contingency is supposed to be used up 100% for the purposes it was intended for. Contingency is supposed to be used up 100% for the purposes it was intended for. Under the control of the project management Under the control of the project management

Risk Evaluation Committee Slide 6 Design Development Allowance  An allowance to cover the cost of changes in design and design methods not attributable to any other basic cause such as changes in output capacity of plant, changes in the originally defined scope of work, etc. It does not cover development of technology and normal evolution of design as well as improvements to design due to feedback from operation of other similar plants.  Established and proven technology should carry very little, if any, such allowance. Untested or relatively new technology should carry higher design development allowance.

Risk Evaluation Committee Slide 7 COST ESCALATION  Cost escalation is the provision in actual or estimated costs for an increase in the cost of equipment, material, labour, etc., over that of the estimate date, due to continuing price level changes during the duration of the project.

Risk Evaluation Committee Slide 8 RISK ANALYSIS  Risk analysis is carried out to show the level of probability that a certain estimate will not overrun the projected amount. Based on the risk avalysis, a certain allowance will be added or deleted from the overall estimate cost to achieve a certain level of confidence. Acceptable levels of confidence and probability rates are established by the SNC-Lavalin Corporate Management.

Risk Evaluation Committee Slide 9 RISK ANALYSIS Threats and opportunities Threats and opportunities Reasonable unknown unknowns Reasonable unknown unknowns Reasonable and unreasonable risk Reasonable and unreasonable risk Real risk versus ignorance of facts Real risk versus ignorance of facts Amount of risk is based on Monte Carlo simulation Amount of risk is based on Monte Carlo simulation May or may not be used during the project May or may not be used during the project Proactive risk management and mitigation essential Proactive risk management and mitigation essential Not all risks are managed or mitigated Not all risks are managed or mitigated Management & mitigation of risk is not free. Management & mitigation of risk is not free. Nothing or all of risk allowance may be used Nothing or all of risk allowance may be used

Risk Evaluation Committee Slide 10 PROJECT RESERVE  This category of provision covers elements of cost outside the defined scope of work. Usually, project reserve is determined by the Client who carries it over and above the budget provided by the project management for the project execution, and is necessary for his financial arrangements.  This type of provision cannot be « factually » estimated. If required by the Client, the project manager and the project estimator may have to assist the Client to establish such an allowance as a result of a separate analysis.