The approach to calculating contingency will depend on the lifecycle stage, the level of detail known about project design and risk profile of the project or program. The two main approaches are:
• Deterministic - fixed percentages of the base cost estimate. This is a simplistic method for estimating contingency. It allows for estimates of contingency funds when little information is available. It will have greater certainty if it is based on actual cost performance of similar completed projects.
• Probabilistic - analysis to estimate contingency requirement based on probability of occurrence. This method is more complex than the deterministic method and estimates contingency requirements based on the risk profile of a project. It relies on an accurate and complete risk profile.
The deterministic approach may be more appropriate during early stages of project development while probabilistic approaches are more appropriate for later stages and higher risk projects.