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Foreword
1. Introduction to the Guidelines
2. User Instructions
3. Preparing and Appraising Investment Project
3.1. Investment Projects Overview
3.2. Possible Investment Projects
3.3. Appraisal Checklists
3.4. Forecasting
3.4.1. Introduction to Forecasting
3.4.2. Using the COSTAB Model
3.4.3. Preparing Project Cost Estimates
>>3.4.4. Determining Contingencies
3.4.5. Disbursement Profiles
3.4.6. Preparing Financing Plans
3.4.7. Computing Incremental Project Cash Flows
3.5. Preparing Financial Benefit-Cost Analyses
3.6. Loan Covenants
3.7. ADB Reports
4. Financial Management of Executing Agencies
5. Reporting and Auditing
6. Financial Institutions
7. Knowledge Management
Financial Management and Analysis of Projects : 3. Preparing and Appraising Investment Project : 3.4. Forecasting

3.4.4. Determining Contingencies

3.4.4.1.1. Contingencies are an integral part of the expected total project cost and normally are necessary for all project items involving significant expenditures. Contingencies cannot provide assurance against the effects of all possible adverse events or conditions.

3.4.4.1.2.Contingency allowances should reflect probable (forecast) physical and price changes and costs arising from special risks that can reasonably be expected to increase the base cost estimate. All contingency allowances should be identified in cost tables separately from base cost estimates and any special features relating to them should be explained in the RRP text.

3.4.4.1.3. Separate estimates should be made of physical contingencies and of price contingencies and shown as line items in the project cost table. For projects with several major components, it is generally desirable to present contingency estimates separately for each component as well as for the project as a whole. The text accompanying the cost tables should discuss the physical factors, price changes, and risk factors expected to affect the project costs from the date of the base cost estimates specified in the RRP and the completion of the project.

3.4.4.1.4. Where financing charges are included in the project Cost Estimates table, contingencies may be necessary to reflect possible increased costs of funds during project implementation (outside of loan agreements that normally fix the interest rates on loans that may be used to finance FCDD, etc). These increases in financing costs should be regarded as price contingencies, but included in the financing charges and disclosed (with justification) in the RRP.

3.4.4.1.5. Appraisal missions should confirm that: (i) the estimates produced for RRPs specifically designate all physical and price contingencies as such, (ii) the amounts are reasonable, and (iii) no contingencies are included in the base cost estimates. Note the following exceptions:

  • technical assistance projects
  • financial institutions that propose to implement industrial and agricultural credit projects, and
  • sector and subsector adjustment loans.

3.4.4.1.6. In the case of technical assistance projects and industrial development finance and agricultural credit projects-where the project is essentially a line of credit to help finance a program defined in financial terms and without specific physical content-contingency allowances should not be added separately.

3.4.4.1.7. Price contingencies should only be included for those sector/subsector loans, where physical targets may have been broadly defined but the exact scope is not essential to the success of the project (e.g., installation of 500 serviced sites as part of a rolling program, or maintenance of rolling stock in railway workshops).

3.4.4.1.8. The text of the RRP should specify exceptions. The impact on such projects of any shortfall in the expected amounts of works, goods or services should be tested by sensitivity analysis.

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3.4.3. Preparing Project Cost Estimates		Next>>
3.4.5. Disbursement Profiles