Industry: Project Management Product: ModelRisk Application: Budget Control
The PMI benchmark for civil infrastructure is a 10–30% cost overrun, and a 10% blanket contingency is what most contractors quote into bids. Yet a $200M highway build with that boilerplate buffer carries a 35–45% probability of breaching contract price — the deterministic estimate cannot see it, because the deterministic estimate is a single number on a distribution that has a long right tail. Budget control is not about getting the mean right. It is about knowing where the P80 sits and what is driving it there.
A road and bridge contractor in Southeast Asia rebuilt the budget for a 24-month, $200M expressway project in ModelRisk. The objective was specific: produce a P50 baseline that earned-value reports could be tracked against, a P80 commitment number that capital-allocation committees could approve, and a ranked list of drivers that pointed the next dollar of risk spend at the right component. The simulation, run for 100,000 trials, is shown below — and it is the chart that ended the argument about whether a 10% buffer was enough.
The deterministic spreadsheet — base $180M direct plus a flat 10% contingency — handed back $198M and called the bid comfortable. The mean of the simulated cost lands close to that, at about $197M, but the P90 sits at $226M and the empirical probability of breaching the $200M contract price is 42%, not the implied 0% of the deterministic plan. The rest of this study is about where that 42% comes from and what it costs to buy it down.
The bottom-up estimate assembled four direct-cost components and a discrete risk register. Distribution choices were defended against historical project data, not picked off a list.
The PMI risk register added four discrete events drawn each iteration as Bernoulli × impact: monsoon-season overrun (P = 0.55, mean impact $9M, LogNormal), steel-price shock (P = 0.25, mean $14M), permit re-issue (P = 0.12, Triangular $4–18M), and a geotechnical surprise (P = 0.18, Triangular $3–22M).
Reading the distribution back: the P50 sits at $196M and the P90 at $226M — a P50-to-P90 gap of about $31M, which is more than the entire 10% contingency on its own. The "10% buffer" only carries the bid to a P55, not a P80, and the 42% breach probability says the contingency was being priced like an inevitability, not an insurance policy.
Rank-correlation tornado against total-cost output points the risk team at the largest leverage:
Materials price dominates by a wide margin, at roughly ±$16M of half-spread — about half again as large as the next driver. Labor cost is second at ±$11M; the correlated subcontractor draw and the steel-price shock event are tied for third at ±$6M each. The monsoon-overrun event has the highest expected cost impact in the Pareto view below, but a lower spread effect because its occurrence probability of 55% means the simulation prices most of it into the baseline rather than the tail.
The top three events — monsoon, steel shock, geotech — account for about 75% of the expected risk-event cost. That is where mitigation dollars should go first.
Two mitigations were costed and rerun through the same simulation. A fixed-price steel forward contract at a 3% premium to spot eliminated the steel-shock event and tightened materials sigma from 0.22 to 0.14. A monsoon-aware schedule moved 60% of weather-exposed activities outside the rainy window. The combined cost of both mitigations was about $2.2M up-front.
The P90 moves down by roughly $14M and the probability of breaching the $200M contract price drops from 42% to about 27%. For a $2.2M cost-of-risk-treatment, that is a ratio the audit committee can approve in a single meeting — and it is a number that did not exist before the simulation.
A deterministic estimate forces a single number to do two incompatible jobs: it has to be the most likely cost and the commitment number. The Monte Carlo answer separates the two — P50 for what you expect, P80 for what you commit — and tells you, line by line, where the contingency really has to sit.