Accelerated Budgeting for Risk

WHAT CAN WE HELP Y0U ACHIEVE?

Transforming the AFE Budgeting Process for Major Capital Projects

Executive Summary

K Carpenter Associates (KCA) revolutionized the AFE budgeting process for a major capital project, eliminating the traditional contingency estimate, making budget risks transparent, and ultimately reducing the overall estimated spend.

The Challenge

The client traditionally relied on a risk-register approach for budgeting, where each major activity was assessed for potential risks, and a contingency value—often exceeding 15%—was added to the project’s cost.

While this approach aimed to cover uncertainties, it had several downsides. The finance group recognized that over-allocating funds to a budget could stifle corporate growth by limiting available capital for other opportunities. Additionally, the contingency-based approach obscured which specific project risks were inflating the budget, making it difficult for the finance team to assess and manage true budget risks effectively.

In response, the finance group requested the project team abandon the contingency method and instead provide a more precise estimate of the project’s cost, with risks assessed separately. he client aimed to implement a large-scale, multi-module IT system across their global commercial operations.

Our Approach

  • Innovative Cost Assessment: We introduced a new methodology for cost assessment that eliminated the need for a blanket contingency estimate.

  • Accelerated Budgeting Process: We streamlined the AFE budgeting process, reducing it to just three days.

  • Transparent Risk Budgeting: We developed a clear, risk-informed budget that all stakeholders could easily understand and trust..

How We Did It

  • Range Assessment for Key Budget Items: KCA led the team through a thorough range assessment for critical budget items, addressing potential cost variations and uncertainties.

  • Uncertainty Modeling: We modeled cost lines to identify the primary drivers of uncertainty and quantify the magnitude of associated risks.

  • Comprehensive Reporting: We provided a clear and concise report detailing input ranges, the overall budget range, and the degree of risk inherent in the submitted budget.

The Solution

KCA guided the project team through a range assessment approach, evaluating key budget items to determine the potential cost spectrum and associated uncertainties. These assessments were integrated into an uncertainty-based model, pinpointing which budget lines carried the most significant risks and the extent of those risks.

As a result, the team confidently submitted an AFE budget report to the finance group, with explicit risk assessments and transparent risk profiles. This new approach allowed all stakeholders, including project partners, to make informed decisions. Partners could choose to budget at a higher point on the risk curve, fully aware of the probability of various spending outcomes.

Notably, the high end of the budget range was just 7% above the recommended target, a significant improvement from the usual 15% contingency, freeing up $15 million for investment in other projects.