Documentation Requirements
All seven steps must be documented in a Risk Management Plan and Risk Register. For major projects, this documentation forms part of the business case and is subject to independent assurance review.
PCEM Section 10
Managing Risk & Developing Contingencies
Understanding how to identify, assess, and quantify project risks to develop appropriate contingency allowances for Queensland infrastructure projects.
Risk Management Framework
Risk Management in Cost Estimating
Risk management is a fundamental component of PCEM-compliant cost estimating. The Project Cost Estimating Manual requires systematic identification, analysis, and quantification of project risks to develop appropriate contingency allowances that reflect the uncertainty inherent in infrastructure projects.
Contingency is not a discretionary buffer or a fund to cover scope changes — it represents the financial provision required to address identified risks that may impact project costs. The PCEM distinguishes between:
Base Estimate
The most likely cost assuming everything proceeds as planned with no adverse events.
Risk-Adjusted Estimate
The base estimate plus contingency to account for identified risks and uncertainties.
Escalation
Provision for future cost increases due to inflation and market conditions.
For major projects and those requiring Australian Government funding, the PCEM mandates probabilistic risk assessment using Monte Carlo simulation to generate P50 and P90 estimates.
ISO 31000 Aligned
The 7-Step Risk Management Process
PCEM requires a structured, documented approach to risk management. The first three steps establish the foundation for comprehensive risk identification and analysis.
1
Establish Risk Context
Define the project context, objectives, constraints, and risk tolerance. Identify key stakeholders and their risk appetite. Establish risk categories and evaluation criteria specific to the project.
Key Activities
- Review project objectives, scope, and delivery strategy
- Identify internal and external stakeholders
- Determine risk tolerance and acceptance thresholds
- Define risk categories relevant to the project type
- Establish likelihood and consequence scales
2
Risk Identification
Systematically identify all potential risks that could impact project cost, schedule, or quality. Use multiple techniques including risk workshops, checklists, historical data review, and expert consultation.
Identification Techniques
- Facilitated risk workshops with project team and stakeholders
- PCEM risk category checklists (design, delivery, external factors)
- Lessons learned from similar completed projects
- Expert interviews with design, construction, and procurement specialists
- SWOT analysis (Strengths, Weaknesses, Opportunities, Threats)
- Review of project assumptions and constraints
3
Risk Analysis
Assess each identified risk for likelihood of occurrence and potential consequence to project cost. Develop probability distributions for probabilistic analysis or assign discrete ratings for deterministic assessment.
Analysis Methods
- Qualitative assessment using likelihood and consequence matrices
- Quantitative analysis with probability distributions (triangular, PERT, normal)
- Cost impact estimation for each risk event
- Identification of risk interdependencies and correlations
- Assessment of risk timing (when risk could occur in project lifecycle)
Risk Process in Numbers
Quantifying Risk Systematically
7
Process Steps
8
Risk Categories
10K+
Monte Carlo Iterations
P50/P90
Confidence Outputs
Evaluate & Treat
Steps 4–7: From Assessment to Action
The remaining steps evaluate identified risks, determine treatment strategies, and quantify the residual financial exposure that forms the basis for contingency.
4
Risk Assessment
Evaluate and prioritize risks based on their analyzed likelihood and consequence. Determine which risks require active management and which can be accepted or monitored.
Key Activities
- Plot risks on likelihood-consequence matrix
- Classify risks as extreme, high, medium, or low
- Prioritize risks for treatment based on severity
- Identify risks exceeding tolerance thresholds
- Flag risks requiring executive attention
5
Risk Evaluation
Determine the tolerability of each risk and establish priorities for risk treatment. Compare risk levels against acceptance criteria and stakeholder risk appetite.
Key Activities
- Compare risk ratings against tolerance levels
- Consider cost-benefit of treatments
- Assess whether risks are within parameters
- Determine urgency of response actions
- Identify risks requiring monitoring vs treatment
6
Risk Treatment
Develop and implement strategies to address prioritized risks.
Avoid
Eliminate the risk by changing project scope or approach.
Transfer
Shift risk to another party such as a contractor or insurer.
Mitigate
Reduce likelihood or consequence through proactive actions.
Accept
Acknowledge the risk and provision contingency for potential impact.
Treatment Plans Must Include: Specific actions, responsible parties, timelines, cost of treatment, and expected residual risk after treatment.
7
Determine Financial Impact (Residual Risk)
Calculate the residual cost impact of risks after treatment strategies are applied.
Financial Quantification
- Assess remaining likelihood after treatments
- Quantify residual cost exposure
- Input into @Risk for Monte Carlo simulation
- Generate P50/P90 estimates
- Document assumptions and sensitivity
- Develop contingency drawdown plan
Comprehensive Coverage
Eight Categories of Project Risk
PCEM identifies eight primary risk categories that should be considered for all Queensland infrastructure projects.
Design Development Change
Risks arising from incomplete or evolving design, scope refinements, stakeholder requirement changes, or discovery of unforeseen conditions during design development.
Common Examples:
- Design refinement revealing additional scope
- Geotechnical conditions differing from desktop studies
- Heritage or environmental discoveries
- Stakeholder-driven design changes
- Value engineering modifications
Standards and Policies Change
Risks from changes to technical standards, government policies, planning scheme amendments, or regulatory requirements during project development or delivery.
Common Examples:
- New or revised technical standards (e.g., Austroads updates)
- Environmental or planning regulation changes
- Safety standard amendments
- Accessibility requirement changes
- Local government planning scheme updates
Third Party Influence
Risks from external stakeholder actions or requirements, including utility authorities, rail operators, councils, environmental agencies, and private property owners.
Common Examples:
- Utility relocation requirements and timing
- Rail authority interface and possession requirements
- Council infrastructure standards and contributions
- Environmental agency approval conditions
- Community or stakeholder objections
Revised Functionality
Risks arising from changes to project objectives, service requirements, performance specifications, or operational needs as the project develops.
Common Examples:
- Traffic growth forecasts exceeding initial projections
- Changes to operational or maintenance requirements
- Technology or ITS requirement changes
- Asset lifecycle requirement amendments
- Integration requirements with other projects
Principal's Costs
Risks related to costs borne directly by the principal (government agency), including project management, consultants, permits, approvals, and internal staff costs.
Common Examples:
- Extended design consultant engagement
- Additional environmental or planning studies
- Project management office costs
- Permit and approval fees
- Independent reviews and assurance
Project Delay
Risks of schedule extension due to approvals, design, procurement, construction issues, or external factors. Delays often result in escalation costs and extended overheads.
Common Examples:
- Approval process delays (environmental, planning, heritage)
- Utility relocation schedule impacts
- Contractor availability or procurement delays
- Weather events or seasonal constraints
- Material or equipment supply chain issues
Property Acquisition
Risks associated with land acquisition processes, including valuation uncertainties, negotiation outcomes, tribunal determinations, and relocation costs.
Common Examples:
- Property valuations higher than estimates
- Landowner negotiation extending timelines
- Land Court or tribunal cost determinations
- Easement and access costs
- Business relocation and disturbance costs
Unmeasured / Unidentified Items
Risks from scope elements not yet identified or quantified in the estimate, often due to incomplete design, unforeseen site conditions, or inadequate investigations.
Common Examples:
- Contaminated land or materials
- Unexpected underground services or structures
- Aboriginal or European heritage discoveries
- Acid sulfate soils or reactive materials
- Omissions or gaps in scope definition
Assessment Methods
Risk Evaluation Approaches
The PCEM recognizes two primary approaches to evaluating project risk and developing contingency allowances.
Deterministic Approach
Uses single-point estimates for risk likelihood and consequence through risk matrices or percentage-based contingency factors. Assigns discrete likelihood ratings (rare to almost certain) and consequence ratings (insignificant to severe), then plots risks on a likelihood-consequence matrix.
When Appropriate: Suitable for OnQ Type 3 (routine) projects, early strategic planning estimates, and projects under $10 million where probabilistic analysis is not cost-effective.
Typical Ranges: Planning 50-100% | Concept 25-40% | Development 10-20% | Implementation 5-10%
Probabilistic Approach (Monte Carlo)
Uses Monte Carlo simulation with @Risk software to model the full range of possible cost outcomes. Assigns probability distributions to uncertain items, inputs risk events with likelihood and cost impact, defines correlations, and runs 10,000+ iterations to generate P50 and P90 estimates.
When Required: Mandatory for OnQ Type 1 (Major Projects), OnQ Type 2 (Complex Projects), and all Australian Government funded projects over $25 million.
Outputs: P50 & P90 estimates, S-curve distributions, tornado diagrams, and sensitivity analysis.
P50 vs P90: Understanding Confidence Levels
P50 (50th Percentile): The estimate has a 50% probability of being exceeded and 50% probability of not being exceeded. This represents the "expected value" or most likely cost outcome. P50 is appropriate for internal planning and risk-sharing delivery models.
P90 (90th Percentile): The estimate has a 90% probability of not being exceeded (only 10% chance of cost overrun). This represents a high-confidence budget for funding approvals. P90 is typically required for business cases, government funding submissions, and fixed-price contracts.
PCEM Requirement: Major project business cases must present both P50 and P90 estimates, with clear explanation of the difference representing risk-based contingency.
Expected Contingency Ranges by Project Phase
While every project is unique, PCEM provides guidance on expected contingency ranges based on project maturity and information availability. These ranges apply to deterministic estimates; probabilistic estimates determine contingency through Monte Carlo simulation.
| Project Phase | Design Maturity | Typical Contingency Range | Key Uncertainties |
|---|---|---|---|
| Strategic Planning | 0-10% | ±50% to ±100% | Concept only, no design, high scope uncertainty |
| Concept Phase | 10-30% | ±30% to ±50% | Preliminary design, limited investigations, scope refinement likely |
| Development Phase | 30-90% | ±10% to ±20% | Detailed design progressing, most risks identified, construction methodology defined |
| Implementation Phase | 90-100% | ±5% to ±10% | Complete design, specifications finalized, limited scope uncertainty |
Important Considerations
- Project Complexity: Complex projects (OnQ Type 2) or novel delivery methods may require contingencies at the upper end of these ranges.
- Risk Exposure: High-risk projects (e.g., brownfield urban locations, significant environmental constraints) may justify contingencies above standard ranges.
- Market Conditions: Volatile markets or supply chain uncertainties may warrant additional risk allowances.
- Probabilistic Results: For Monte Carlo estimates, the difference between P50 and P90 represents the calculated contingency based on actual project risks.
- Documentation: Contingency assumptions and calculations must be clearly documented in the Basis of Estimate.
Accuracy Over Time
The Cone of Accuracy
Estimate accuracy improves as projects mature from strategic planning through to implementation. As design progresses and uncertainties are resolved, the range of possible cost outcomes narrows.
Progressive Uncertainty Reduction
- Strategic Planning: Wide uncertainty due to conceptual scope definition and minimal design
- Concept Phase: Uncertainty reduces as preliminary design clarifies scope and major risks are identified
- Development Phase: Detailed design resolves most uncertainties and quantifies risks more accurately
- Implementation Phase: Final design and complete specifications minimize remaining uncertainties
This progressive refinement must be reflected in contingency allowances, with higher contingencies in early phases gradually reducing as the project matures and risks are retired.
Our Expertise
How Cenex Manages Project Risk
Sophisticated risk management techniques aligned with PCEM requirements, delivering robust and defensible contingency allowances.
Facilitated Risk Workshops
Structured risk identification workshops covering all eight PCEM risk categories, bringing together design, construction, procurement, and stakeholder expertise for comprehensive risk capture and aligned treatment strategies.
Monte Carlo Simulation
Licensed @Risk software with qualified analysts experienced in probabilistic cost estimating. We model correlations between dependent risks, run sensitivity analyses, and identify key cost drivers requiring management attention.
Risk Register Development
Comprehensive risk registers documenting assessment, treatment strategies, residual exposure, and responsibility assignments. Integrated with cost estimates for ongoing risk monitoring and contingency drawdown tracking.
P50 & P90 Estimate Generation
PCEM-compliant probabilistic estimates with full supporting documentation including S-curves, tornado diagrams, and sensitivity analysis for business case submissions and independent assurance reviews.
Why Choose Cenex
PCEM Risk Management Expertise
With CE1 pre-qualification and extensive experience in probabilistic cost estimating for Queensland major projects, Cenex delivers risk-adjusted cost estimates that meet all PCEM requirements while providing actionable insights for project risk management.
Licensed @Risk Software
Current licenses for Monte Carlo simulation and probabilistic analysis
Qualified Risk Analysts
Team members with specialized training in infrastructure risk assessment
OnQ Type 1 & 2 Track Record
Delivering P50/P90 estimates for major and complex projects
Independent Review Capability
Third-party risk assessment and estimate validation
Need PCEM-Compliant Cost Estimates?
Cenex delivers CE1 pre-qualified, PCEM-compliant cost estimates for Queensland infrastructure projects.