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Glossary

P50, P80 and P90

A cost paired with the probability that it will not be exceeded, read off the cumulative curve produced by a risk simulation.

A P-value states confidence, not amount. A P50 estimate is the figure with a 50% likelihood of not being exceeded; a P90 estimate has a 90% likelihood. The Australian Department of Finance puts it plainly: a P-value refers to the probability of the cost not being exceeded, and does not indicate a quantum of cost or proximity to the cost actually realised.

The number comes from a Monte Carlo simulation of the identified risks, which produces a cumulative probability curve. The higher the confidence, the further along the curve and the larger the contingency, and the curve is asymptotic: reaching P100 would mean allowing for every risk at its full estimated cost, which is an impractically large allowance.

Which level to require is a governance decision rather than a technical one, and it is usually set by stage. The Commonwealth two stage capital works process requires P50 at first stage approval and P80 at second, on the reasoning that confidence should rise as the definition does.

Sources

Australian Government Department of Finance, Defining P50 and P80, within the Commonwealth Property Management Framework, RMG 500, for the definition, the S curve, the two stage confidence requirement and the observation on optimism bias. AACE International Recommended Practice 56R-08 for contingency set at roughly equal probability of overrun and underrun. US Government Accountability Office, Cost Estimating and Assessment Guide, GAO-20-195G, March 2020, on estimates carrying confidence levels that mean nothing.

Read the sources