In a feasibility study (FS), one of the most critical tasks is determining whether the estimated budget is realistic.
In the past, there was a tendency to keep budgets as low as possible. However, in today’s environment of rising material and labor costs, incorporating adequate contingency has become essential.
From the perspective of an Owner’s Engineer, this article explains the structure of contingency within FS estimates and clarifies the meaning of key cost factors such as:
- Escalation rate
- Engineering design coefficient
- Lang factor
- Overhead and management cost factors
Understanding how these elements interact is key to building a financially resilient project.
Main Body
1. The Structure of Contingency in FS
A typical FS cost structure can be organized as follows:
Base Cost = Material Cost + Labor Cost
(Base Cost may also be expressed as: Material Cost × Lang Factor)
Additional components include:
- External engineering cost = Base Cost × Engineering Design Coefficient
- Future price projection = Base Cost × Escalation Rate
- Management cost = Base Cost × Management Coefficient
- Overhead = Total Cost × Overhead Coefficient
While company practices vary slightly, this framework represents a practical and structured way to organize contingency.
The most visible and intuitive contingency element is the escalation rate.
However, design coefficients and the Lang factor are also indirectly affected by price increases and can function as hidden buffers.
2. Escalation Rate — The Explicit Contingency
The escalation rate reflects anticipated cost increases between the estimation phase and project execution.
For example:
- If 2023 cost level = 100
- Execution planned for 2025
- Expected cost level = 120
This projected increase should be incorporated into the estimate.
Escalation is typically applied to the combined material and labor costs.
In some organizations, material cost contingency and labor escalation are treated separately.
The challenge differs depending on perspective:
For EPC contractors:
- High escalation → Risk of losing orders
- Low escalation → Risk of reduced profit
For Owner’s Engineers:
- High escalation → Project may be canceled
- Low escalation → Budget shortfall in later phases, requiring painful adjustments
Finding a balanced escalation assumption is therefore critical.
3. Engineering Design Coefficient — A Hidden Buffer
From an Owner’s Engineer standpoint, the engineering design coefficient can act as a form of contingency.
In in-house engineering projects, this cost may not be visible.
However, when outsourced, it becomes a significant component.
Design cost is generally expressed as:
Design Cost = (Material + Labor) × Coefficient
Typical values range from 10% to 20%, selected at the estimation stage based on project characteristics.
However, escalation affects materials, labor, and engineering services differently.
Materials are typically more sensitive to market volatility, while design costs follow a different pricing curve.
This raises an important question:
Is it appropriate to apply engineering cost strictly as a coefficient of material and labor cost?
While contingency can be embedded in the coefficient, continuously inflating it over time risks structurally increasing overall project cost.
Ideally, the design coefficient should reflect project characteristics:
- Equipment type
- Materials of construction
- Size and diameter
- Building structure
- Site conditions
At the FS level, however, estimation methods inherently accept a degree of approximation.
Engineers unfamiliar with FS may attempt bottom-up precision, but much of that effort can disappear within coefficient-based methods.
4. Lang Factor — Reflecting Cost Structure Balance
The Lang factor is often used to estimate total installed cost from major equipment cost.
Although it can technically absorb contingency, it should fundamentally reflect plant characteristics, not serve as an artificial buffer.
In essence:
Lang Factor ∝ Labor Cost / Material Cost
Since materials and labor inflate at different rates, adjusting the Lang factor may indirectly reflect structural shifts in cost composition.
However, long-term distortion of the Lang factor purely for contingency purposes may undermine its original engineering meaning.
5. Overhead and Management Costs — Structural Multipliers
From an Owner’s Engineer perspective, overhead and management costs also function as contingency elements.
These are often added as percentages, for example:
- 10% management
- 10% overhead
Application methods matter.
Simple addition:
1 + 0.1 + 0.1 = 1.20
Multiplicative:
(1 + 0.1) × (1 + 0.1) = 1.21
With small percentages, the difference is minor.
But with higher values:
Additive:
1 + 0.2 + 0.3 = 1.5
Multiplicative:
(1 + 0.2) × (1 + 0.3) = 1.56
The gap becomes more noticeable.
At FS level, such structural choices influence the final contingency scale more than many engineers realize.
Conclusion
Contingency in feasibility studies is not limited to the escalation rate alone.
It is built through a combination of:
- Escalation rate
- Engineering design coefficient
- Lang factor
- Management and overhead factors
Understanding the meaning and interaction of these components is essential for realistic budgeting.
Overestimating contingency may stop a project before it begins.
Underestimating it may destabilize execution later.
A well-structured FS estimate acknowledges uncertainty while maintaining economic credibility.
If you are involved in plant design, maintenance, operations, or capital investment planning, I welcome your thoughts and discussion.
Comments