(This post contains affiliate hyperlinks. Please read my full disclosure.
Your project was approved for funding. This is an enormous step. It is amazing to see how many project managers struggle to get their budget approved.
Without funding, you can’t accomplish much on a project.
But before you celebrate too soon, there are details to be aware of.
What was the approval? What are the limits and constraints on how much you can spend? There will be many questions. Not least, is it enough? Is the funding inclusive of contingency? (Because I put some in the request.)
You’ve come to the right place if you want to know what budget contingency means. This article will explain what project contingency is, how to calculate it, and how to manage them within the scope of your projects.
What is project contingency?
Why is contingency important? Why risk matters
How to calculate contingency4 Common methods of calculating contingency
How to manage contingency money
How do I access contingency funds
What is a contingency strategy?
Quick questionsWhat contingency should an project have?
How is project contingency calculated
What is a contingency example?
What is project contingency?
Project contingency refers to the extra resources that are set aside to address any potential risk or uncertainty in a project.
Two types of contingency are commonly used in projects:
Budget contingency: Additional funding to address problems and realized risks related to a particular event
Schedule contingency: A buffer for extra time in the event of schedule delays (not to be confused with your estimates).
In a project contingency planning, the amount of each will be listed. In practice, this could be a paragraph or two in your risk management plan or project plan. These figures will be included in the budget or schedule management plan.
Why is contingency important
According to PMI’s 2021 figures, 62% of projects are completed within their original budget. No organization wants to see their budget go up in cost. Regardless of how hard you try, it is impossible to predict the future or anticipate every problem.
As you can see, contingency allows us present final budget estimates in a range.
Calculating the Anticipated Final cost and confidence range. Image source: IPA Cost Estimating Guide, 2021, Figure 11. Reproduced under the Open Government Licence 3.0. Take the cost baseline and add the mitigation costs to deal with ‘general’ and residual risks. This will give you the final project cost. The IPA Guidance is only for construction budgets, but the general premise can be used as a best practice for all types of projects.
Understanding contingency is crucial to understanding risk: this is the first step.
Next: 14 Common Project Risks. Perhaps some of these will help you to improve your contingency plan.
Why is risk important
It is impossible to list all possible problems that could occur on a project. As project managers, we know that the unexpected will happen.
You may have an idea of what is likely to happen based on your past experience. Even if you have a general idea of what is likely to happen, you still need to have a plan and options for dealing with it when it does.
Project contingency is where it comes in. It is the promise of additional resources (typically money and time) to a project to address potential risks and uncertainties. This is done to increase the likelihood that the project will be completed within the budget.
Schedule contingency could be in the form of extra time or a buffer in a project’s schedule. We might add several days or even weeks to a project to account for unforeseen delays.