OBTAINING THE BUDGET CONTINGENCY RESERVE THROUGH THE MONTE CARLO METHOD: STUDY OF A FERRY CONSTRUCTION PROJECT

Lorena Para-González, Carlos Mascaraque-Ramírez, Ana E. Madrid
2018 Brodogradnja  
The naval sector of new construction is characterised by high cost programmes and a low degree of definition in the stages of tendering. With these requirements, an initial, highlycompetitive budget should be developed with acceptable risk. For this reason, it is usual in this field for a budget Contingency Reserve to be defined, in order to cover probable range increments, as well as probable deviations that could trigger economic losses. The budget Contingency Reserve estimate is usually
more » ... ate is usually carried out based on shipyard experience. However, problems arise when the shipyard does not have enough experience in the concrete type of vessel to be built. In this research, the use of an extension of the triangular Monte Carlo distribution model is proposed, with the aim of calculating the likelihood of complying with the calculated budget. From this result, a Contingency Reserve that provides enough security to execute the project within the limits of the economic risk defined by the organization can be calculated. The proposal introduced in this study allows managers to obtain a more optimal estimate of the Contingency Reserve, therefore reducing economic risks. Obtaining the budget Contingency Reserve through Carlos Mascaraque-Ramírez the Monte Carlo method: study of a ferry Ana E. Madrid construction project 80 series. This increases the problem of using production techniques from other sectors, such as those of automobile and aerospace. It is therefore advisable to work under the concept of independent unit construction or prototypes [2] . In this respect, the research of Kolić, Lee and Fafandjel [3] identified the necessity of mitigate risks in large engineering construction project (LECP), especially in the case of prototype vessels, using Monte Carlo simulation to execute a contract risk analysis so that shipyard management could choose the contracting model with the least amount of risk. Shipyards have to take their historical data into account, which are very useful for the generation of production simulation models [4] , in order to be more efficient and competitive. Similarly, an alignment between design and manufacturing must be sought [5] . The studies of Song, Woo and Shin [6] on the systematisation and progress of shipbuilding production management for a flexible and agile response, reducing time and cost, show the importance of always maintaining the idea of the shipyard as a company in terms of the fulfilment of the budget calculated for the project. The agreed on budget in the bidding process will not only have an impact on the production of the vessels, but will also be relevant for the life cycle of the project and the need to extend the lifespan of the ships [7]. At the same time, these budgets will be crucial in order to define the company's competitiveness [8] and the risks they are able to take in reducing the sale price of their ships [9] . It is well known that the design of a ship evolves during its construction and undergoes multiple modifications, as a consequence of the spiral design itself and the improvements applied in the successive ships in the series [10] . But this circumstance is difficult to translate to the project budget, since the budget will evolve and will be revised throughout the life of the project [11] . However, the total amount agreed on in the contract between the manufacturing shipyard and the ship operator will always be maintained, with different management tools put into practice in order to control the cost and the execution time of the shipbuilding projects [12] . Following the model developed by the Project Management Institute (PMI) [13] , the project budget is made up of two large components: the cost baseline or control accounts and the management reserve. In turn, the cost baseline is divided into the Contingency Reserve and the work package cost estimates. Regarding the project budget stipulated in the contract, it becomes key, due the nature of the bidding process, to develop a calculation as reliable as possible of the total amount at an early stage [14] . These international biddings have turned into very disputed processes, where the different shipyards present their offers with adjusted term and cost offers [15] . Due to the uncertainty of most projects, it is necessary to endow the budget with the relevant entry of Contingency Reserve to bear the impact of cost deviations. These variations are usually produced by range variations, changes in timetable rates, modifications of the suppliers' prices [16] , etc. Contingency Reserves are often viewed as the part of the budget intended to address the "known unknowns" that can affect a project [13] . It is common for companies to calculate management reserves by means of fixed percentages without entering into detailed studies, due to the lack of means to carry out better approximations. That is why different authors have focused their attention on the subject and have tried to develop models capable of covering this need [17] . In the specific case of shipbuilding, being able to estimate the best possible values of the Contingency Reserve is clearly necessary, due to the high cost of the projects to be developed. Therefore, great interest in the definition of calculation models which will be as reliable as possible for the definition of these values, has been expressed. In this sense, there Obtaining the budget Contingency Reserve through Lorena Para-González the Monte Carlo method: study of a ferry Carlos Mascaraque-Ramírez construction project
doi:10.21278/brod69305 fatcat:mamyj5cb3vdy5c2lqdx7txuusm