Contingency planning is an essential aspect of project management, providing a “Plan B” for unexpected events and uncertainties. However, it’s crucial to understand what contingency should and should not be used for in to ensure the integrity of the project control process.
What is Contingency?
Contingency refers to the allocation of additional resources—usually time, money, or both—to address unforeseen events or risks that could impact a project’s success. It’s a critical component of risk management, helping to mitigate the effects of unexpected issues without derailing the project.
DO – Identify and Quantify Potential Risks Early:
Conduct a thorough risk assessment during the planning phase to identify potential risks. Use historical data, expert judgment, and risk assessment tools to create a comprehensive list and Assign a probability and impact value to each identified risk. This quantification helps in determining the appropriate amount of contingency needed.
DO – Allocate Contingency Proportionately:
Higher risks should have more contingency allocated to them. Avoid a one-size-fits-all approach. Keep contingency funds separate from the project budget to prevent it from being used for non-contingency purposes. This separation ensures that the funds are available when truly needed.
DO – Regularly Review and Adjust:
Continuously monitor project progress and review the status of identified risks. Adjust contingency allocations as necessary based on new information and changing circumstances.
DO – Document and Justify Usage:
Document the reasons for using contingency funds, including the specific risks or issues that necessitated their use. This documentation provides transparency and accountability.
DO – Use Contingency for Risk Mitigation:
Utilize contingency funds to address unexpected issues that were identified as potential risks. This could include unforeseen technical problems, material shortages, or minor scope changes due to evolving project requirements.
DON’T – Use Contingency to Conceal:
Contingency should not be a substitute for thorough planning. Avoid using contingency funds to cover costs resulting from inadequate project planning, estimation errors, or lack of due diligence.
Scope Creep:
Do not use contingency to fund scope creep—uncontrolled changes or additions to the project scope. Manage scope changes through a formal change management process with separate funding.
Routine Expenses:
Regular project expenses, such as salaries, standard materials, and ongoing operational costs, should not be covered by contingency funds. These should be part of the main project budget.
Known Risks:
Known and expected risks should be addressed through specific budget allocations, not contingency. Contingency is for unforeseen and unexpected risks, not for risks that were known but not properly budgeted for.
Improper Resource Allocation:
Avoid using contingency to cover costs resulting from inefficient resource allocation or management. Ensure that resource planning is robust and well-managed from the outset.
Mismanagement and Errors:
Contingency should not be used to cover up for managerial errors, mismanagement, or lack of oversight. Effective project management practices should prevent these issues from occurring.
Conclusion
Proper use of contingency is crucial for the success of major projects. By following best practices, such as identifying and quantifying risks, allocating funds proportionately, and regularly reviewing and adjusting contingency plans, project managers can ensure that their projects remain on track even in the face of unforeseen challenges. Remember, contingency is a safeguard against the unexpected, not a catch-all solution for poor planning or management.
