Risk Allowance
A Risk Allowance is a financial provision included in a cost plan or estimate to cover the potential impact of identified risks that may affect the final cost of a construction project. It is a critical component of responsible cost management.
Types of Risk Allowance
According to NRM 1, risk allowances are categorised as:
- Design development risk – Covers incomplete design information
- Construction risk – Covers site-specific and buildability risks
- Employer change risk – Covers potential client-driven changes
- Employer other risk – Covers other client-side uncertainties
Risk vs Contingency
While often used interchangeably, there is a distinction:
- Risk allowance – Addresses specific, identified risks with assessed probability
- Contingency – A general allowance for unforeseen items
Quantifying Risk
Risk allowances are typically quantified through:
- Risk registers with probability and impact assessments
- Monte Carlo simulation for complex projects
- Percentage allowances based on project type and stage
Management of Risk Allowances
Risk allowances should be actively managed, with transfers to the base estimate as risks are realised or released as risks are retired.
Related Terms
See also: Contingency Costs, Project Budget, Cost Plan
