From the outset of any project, we should be clear about how we are handling contingency. The approach should be written down and agreed with the sponsor(s) so they are clear from the earliest stages (as part of business case) as this is one areas that seems to be poorly understood and managed, and as such "morphs" as the project progresses.
Contingency and how we calculate and utilise (spend) it needs to be clearly defined and carefully managed. The mechanisms for reporting and controlling contingency should be set at project initiation. What we normally see is contingency added at the start of the project and then simply merged into the project budget and spent without any approval process. If the money is available it will get spent !
So what is contingency and why do we use it ?
At the outset of any project we have to estimate the effort, costs, timelines, resource, tools and infrastructure etc. that will be required to complete all the outcomes agreed in the Business Case or Project Charter. The larger the project the more difficult this becomes as estimates are just that, estimates (or guesstimates) and we will not know whether we were right or not until the end of the project when we have the "actuals" to hand.
So we utilise contingency to take account and make allowance for the level of uncertainty in our estimates. We are not fans of "blanket contingency allowances". In many (particularly large) organisations, we have seen simplified rules that apply to estimates based on project stage or scale. In general these approaches simply inflate estimates and end up being included in the project budget without discussion or challenge.
It is better to build in contingency at as low a level as possible and to have "rules" on how much contingency to apply. It might be as simple as having categories of estimates and associating the amount of contingency with each activity/task/resource estimate. For example:
"I am Certain" - 0% Contingency
"I am pretty sure" - 10% contingency
"This is my bast guess based on experience" - 20% contingency
"This is a guesstimate" - 50% contingency
Blanket contingency applied to the overall time and budget should be used for items we have not yet considered or included, not for items we have included in our plans and budgets.
Contingency should be revisited at defined timelines and should not remain static for the term of the project. For example post design, we should have pretty accurate estimates so should be able to estimate with a level of certainly.
Contingency is not always "estimated effort contingency" - we also need to consider the experience of the person carrying out the activity/task, but we will cover that in a separate blog item.
At project outset we need to agree (generally with the sponsor and finance area) how we will plan for and intend to draw down/spend contingency. Do we prepare plans with or without contingency. Should there be two plans ? How do we draw down contingency ? Do we plan (i.e. time to complete) with contingency, but only allocate budget without contingency and set rules for drawing this down ?
Every organisation and project will have different rules, but it is important to have them and have an agreed position on this at project initiation.
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