What is a project contingency? No, not the Halo Fan Game (Google that). Here we’re talking about a key staple of the project management planning process.
If you’re the lead manager on a project you’ll have likely cost the work in terms of both money and time to create an estimate or forecast. Project contingency is simply the process by which you account for uncertainty in that estimation by factoring in any risk. This is then added to the original estimate to ensure the company is prepped for a worst-case scenario that could otherwise derail a project.
Of course, the key question you’re looking to answer here is ‘how much contingency should the project have?’ As well as highlighting the factors to consider in your Project Contingency Plan, this guide looks closely at how to calculate contingency as a percentage, a value, or a range.
ADDING PROJECT CONTINGENCY TO PROJECT PLANS
A good project plan should have contingency built-in, but building an accurate forecast should be more science than art and calculating contingency is no different.
Part of a good project contingency management plan is to scope out the critical success factors. It’s unlikely that this will be in a single area, it’ll be an amalgamation of the moving parts of your typical delivery cycle. Part of that are deadlines and budget - essentially things that can be missed if planned poorly or the client moves the goalposts. Project contingency should evaluate these parts of the plan and ask the estimator: how could this go wrong and what will it cost the business if it does? To properly prepare contingencies for your project, resource management software can help you clearly manage and prepare your company for any potential problems.
PROJECT CONTINGENCY PLAN
Taking the above into account, view a Project Contingency Plan as a ‘Plan B’. Your main focus is on pre-planning what resource(s) it will take to move back towards achieving your critical success factors in the event a risk becomes a reality. It goes even further as you'll also know the likelihood of the risk happening in the first place.
Please note that it only works for identified risks so there is some pre-work involved in understanding the risks to your delivery. Also don’t confuse contingency with mitigation; the hope is that these risks don’t occur and mitigation is designed to prevent them - contingency is the sandbag in the plan should the risk actually materialize, so you're not meeting unprepared costs.
HOW TO CALCULATE PROJECT CONTINGENCY
To calculate Project Contingency you will need to consider the variables of your specific project. You will need to consider what project management methods are being used, and how these affect the demands and plans of the project. With a variety of different industries and services being delivered you will need to have several different methods that you can adopt, some of which are listed below:
Percentage of Project Base: In this simple method you take a fixed percentage of the project estimate to calculate contingency, normally based on some predetermined factors or historical data, i.e. you can be relatively sure that X% is right most of the time as you’ve never exceeded this amount in the past. This can further be influenced by:
Expert Judgement: This is where the predetermined factors have been backed by experts with experience of such risk management in the given field. When it comes to calculating contingency cost percentage, drawing on previous experience from in and outside of your team is key.
Guidelines: This is where the classic features of your potentially varying delivery methods (still contained within the parameters of your typical delivery) are classed the contingency percentage is then based on a single class or an amalgamation of classes i.e. class 3 delivery always has a 20% contingency.
Expected Value: This method uses statistics to quantify the impact of pre-identified risks to calculate contingency, whereby the probability of the risk is multiplied by the impact (cost) if it does in fact occur. This means you can add up the number of risks and discover the overall bottom line. Here, you’re looking to arrive at a specific figure for your project budget contingency rather than a percentage of the total cost.
Range Estimating: This project contingency calculation method is a little more complex in that the impact of the risks identified are given a cost range, rather than a simple stagnant figure. This means you can see a minimum impact and a maximum impact, akin to a worst-case and/or best-case scenario. It means correlations in various cost elements can be incorporated, and then the probability of each outcome measured with statistical analysis - i.e. there is a 12% chance of hitting the lower threshold of contingency so you’ll need the amount to be increased. It provides a confidence level in the project contingency figure.
1a. and 1b. are deterministic methods that are often described as simplistic as often no formal and detailed risk assessment has actually taken place and therefore specific projects with niche requirements may be underserved by these techniques. Smaller projects, or those that are repeatable in nature often use this form.
2. and 3. are probability methods and can help if multiple risks to the project have been identified - these project budget contingency calculations are more likely to be adopted on large-scale projects. Both techniques use probability of outcome, meaning they are more accurate forms of project contingency estimation, but they also require simulation programs (or someone who's very good at maths) to figure out. Range estimating is also a strength as it provides a baseline where the probability of over and underestimating the contingency are in fact equal, making it more risk-neutral (when the project is undertaken any risk should balance out).
In all cases an accurate understanding and forecasting of your cash flow is essential to ensure you can properly form contingency plans. The use of Precursive billing software can help you to make sure your business’s finances are as healthy as possible, which will also help you to organise resources for your contingency plans.
CALCULATING PROJECT CONTINGENCY WITH PRECURSIVE
This guide has explained the concept of project contingency and outlined how to calculate your contingency budget using one of three methods: Percentage of Project Base, Expected Value and Range Estimating.
So, where does Precursive fit in? One of the most important parts of making a contingency plan is the pre-planning and identifying what risks you might encounter. Contingency needs to be estimated for situations in which requirements or resources change - when viewing project management through the triangle of scope-cost-time, each of these areas may become impacted. Our software enables you to analyze how these variables changed over time with previous projects, arming you with the data you need to plan out your future contingency budgets.
Precursive aids in both forward-looking and retrospective views of project management data. In the retrospective view you can highlight the trends of not only what factors made your former projects successful (and profitable) but also highlight why deadlines were missed and which individual project components went off-course.
Be it capacity crunches, poor collaboration or not knowing what resource it would take to deliver, Precursive can inform what contingency levels should look like by highlighting who will be involved, what they need to do, and when to execute the plan- should risk become reality. Our software provides the agility to react to risk and ensure the impact is minimized. This means that the guidelines for Project Contingency Estimation can be created from data, not from guesswork.