2.51 In keeping with standard commercial practice, cost estimates for major Defence capital investment programs include a contingency provision that allows Project Managers the facility to retire risk and treat risk events that have materialised into an issue, without the administrative burden of returning to Government for re-approval in each instance. Contingency funding provides a financial safeguard for Project Managers against the inherent uncertainties, risks or unexpected events that may arise during the course of the project. It is especially important in defence projects that typically have greater inherent risk, longer timeframes and are more complex than other commercial projects.
2.52 Quantitative analysis is undertaken for each option presented to Government to identify the potential risks (cost, schedule, technical, commercial, etc) to the project and associated treatments for these risks. The contingency funding is then assigned to the treatment strategies and against any residual risks after treatment. Contingency funding for risk mitigation strategies and treatments is formally reviewed by the DMO during both the Budget and Additional Estimates cycles.
2.53 The quantity of the contingency funding is determined by the level of risk identified for each project before final approval by Government. Hence, the DMO places a strong emphasis on the quality of the risk analysis to ensure an accurate estimation of the contingency funding required and that the level of funding sought is consistent with the project's risk profile. In addition, an assessment of the adequacy of the contingency funding is included in the Gate Review process and is scrutinised by Central Agencies as part of the project approval process.
2.54 To 30 June 2011, of the total contingency allocated across the 28 projects, approximately $1b (or 2.5% of the total approved project budget of $46.1b) has been expended to retire project risks. The areas where risk has been retired using project contingency budgets include:
• Systems development;
• Systems integration;
• Logistics and Support;
• Schedule constraints; and
• Project resourcing.