SCHOOL OF EGINEERING AND TECHNOLOGY (SET)

CONSTRUCTION ENGINEERING, INFRASTRUCTURE

MANAGEMENT
(CEIM)
Research methodology In the Build Environment (CE70.13)
Group Assignment 1
Dr. Bonaventura H.W Hadikusumo
Dr. Djoen San Santoso
Mr. Monichot Samreth st119426
Mr. Chan Vantheav st119487
Miss Aye Myint Thu st119440
Miss Zin Mar Aung st119439
Miss Sapana G.C. st119825
Mr. Diraksh Rahman st119530
 Dr. B.H.W Hadikusumo
Dr. Djoen San Santoso

According to a journal article about “Quantitative Method for Upcoming Cost Contingency
throughout the Project Execution”, the journal seeks to present a method to forecast the project
contingency and updating based on Value at Risk (VaR) at a certain confidence level during the project
execution.

The journal have identified that cost overrun is a challenging problem that every construction project is
facing and how to reduce the chance of facing this problem. The journal proposes a simple but practical
method based on Value at Risk (VaR) to determine the project contingencies during project execution.

According to Project management Institute 2004 “project contingency” refer to extra fund, budget or
time needed above the estimate to reduce the risk of overruns of project objectives to the level that the
organization deem acceptable. We should take into account that the journal stated that we should start
making the contingency as the project progress. When the project begins to progress and achieves some
milestone, the project risk and uncertainties can be identified in more detail. It would be beneficial to
update contingency period by period. While it is a good idea to determine the contingencies before the
project start, but it could limit the number and size of project which a company could invest in and
undertake. In other word, it puts a constrain on company investment and growth.

Data collection is the process of gathering and measuring information on variables of interest, in an
established systematic fashion that enables one to answer stated research questions, test hypotheses,
and evaluate outcomes. Regardless of the field of study or preference for defining data (quantitative,
qualitative), accurate data collection is essential to maintain the integrity of research. Both the selection
of appropriate data and clearly delineated instructions for their correct use reduce the likelihood of
errors occurring.

VaR Reduce Risk of Cost

Overrun
(indpendent) (dependent)

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 Dr. B.H.W Hadikusumo
Dr. Djoen San Santoso

The above diagram could be describe as “Value at Risk method could determine and update project
contingencies during project execution to reduce the risk of cost overrun”

Tremendous effort is required to collect a reliable and accurate information for model input, in the case
of any change in the risk environment the whole process must start from scrap.

The Case study as for example mentioned in the journal; they have used quantitative data and the
following are the data collected:

1. Cost of equipment
2. Labour costs
3. Cost of material
4. Engineering costs.
(Noted that these data are collected during the project execution that include any newly available
information and the project progress and project daily cost and daily progress are analysed to update
contingencies for the quantitative module)

The data in this journal is somehow inconsistent as for “the first half a year has records of 129 days, and
the first year has records of 262 days, including all usual workdays and some overtime during
weekends.”

● In order to get the accurate result, consistent datas are to to be used with all the tests having
equal or similar number of sample size.

Figure: VaR Modeling

process

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 Dr. B.H.W Hadikusumo
Dr. Djoen San Santoso

VaR modeling and contingency updating consist of a circular calculation, implemented in this research
via a simple spreadsheet. The process is presented in Figure. 1. All tasks with a filled background are
parts of VaR modeling. The figure above should give us a general understanding of how the whole
modeling work.

1. Gather information and define VaR parameters

2. Once the project start the as-built data should be gathered continuously

3. Once complete the observation period, the data should be analyzed and reorganized in a
timescales.

4. After analyze of data, the volatility can be calculated, σ such as followed

−1
1
2
𝜎=√ ∑ (𝑝𝑟𝑜𝑓𝑖𝑡𝑖 − 𝜇)2
𝑘−1
𝑖=−𝑘

Where:

- Profiti is the project daily profot/loss for day I (ranging form –k to -1)

- µ is average profit during the observation period in dollars

5. Value at risk is calculated through equation such as follows;

𝑉𝑎𝑅𝑐 = 𝑍𝑐 𝜎 ′ 𝑊 = 𝑍𝑐 𝜎

Where:

- VaRc is the value at risk at confident level of c

- c is confidence level, such as 95%

- Zc is critical value corresponding to confidence level c

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 Dr. B.H.W Hadikusumo
Dr. Djoen San Santoso

- W is value of the whole asset; and

- σ is volatility of the whole asset in dollar value

𝑉𝑎𝑅𝑐,𝑇 = 𝑉𝑎𝑅𝑐,1 × √𝑇

Where:

- VaRc,1 is value at risk for time horizon of the next period equivalent to VaRc

- T is the number of time period

- VaRc,T is value at risk for time horizon of the next T period

6. Finally, repeat the step at every observation period.

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