Risk Perception-Based Project Contingency Management Framework

Project risk management (PRM) involves identifying risks, assessing their impact, and developing a contingency plan. A structured contingency management (CM) approach prevents subjective biases in analyzing risks and developing responses. Previous studies have either focused on improving the accuracy of risk estimates or analyzed, from a qualitative perspective, the relationships between perceived risk and project performance. This study aimed to improve PRM by providing a risk-perception-based contingency management framework (CMF). The CMF guides contingency depletion based on two short- and long-term cost overrun indicators and their respective thresholds. Thresholds and the initial contingency reserve amount are determined by applying the Monte Carlo method to a stochastic, discrete-event, finite-horizon, dynamic project simulation model. The study developed the CMF through a structured approach, validating the simulation model on eight specific project configurations. The results prove that the framework can be applied to any project, shaping the risk response strategy. This study contributes to PRM by explaining the relationships between risk perception and risk responses and providing a prescriptive CM tool.