Project Management: How Much Contingency Do I Need?

By Wendy Isaacs

Unless you’re managing a project with zero risk (unlikely) then before you can commit to budget or timelines you’re going to need to do some contingency planning.

How do you know what the right amount of contingency on a project is? The short answer is you don’t.

If you’ve worked with the client, team and technology before then you can use your previous experience to give you a good idea of costs and the level of contingency you’ll need.

If it’s a new project for a new customer or you’re using new technology or you’re working with a new team or external suppliers/dependencies then the project comes with a higher risk factor and any calculations or knowledge you’ve previously gained are unlikely to apply.

Many Project Managers start off by adding a blanket contingency e.g. 20% to the costs and time of any project however it is hard to articulate the idea/cost of contingency to a business stakeholder (especially in a pitch) using this approach.

You can make a more calculated estimate as to how much contingency you might need by applying a bit of thinking early on. Contingency is linked to risk so a good method to use is Risk Analysis.

Some typical risks that you may want to mitigate by adding contingency on a project might include:

  • The scope of the project changing as more becomes known
  • The initial estimates of the work may been inaccurate
  • You’re working with unknown technologies
  • You’re working with third party dependencies e.g. release management, hosting, APIs

There are of course other ways to mitigate risks other than adding cost/contingency to the project which we’ll cover in another post.

A simple way to calculate a contingency would be to multiply the % probability by the cost of impact. For example a risk probability of 30% multiplied by a cost impact of £10K would result in a contingency of £3K.

You are then able to very clearly show business stakeholders your recommended contingency to mitigate any risk (far better than a blanket percentage). They are able to make a more informed decision based on their appetite for risk as to whether they want to include any contingency or they may decide to accept the risk and understand that the project may cost more.

Many project managers like to include a second contingency amount, often known as the ‘program contingency’. This can be used for risks that were not identified at the start of the project and emerge later. The larger and more complex the project the more likely it will be that you will uncover more risks later on.

There’s no sure fire measure or magic formula to help you establish ‘how much contingency is enough’. As you get more experienced you’ll be able to make more educated guesses.

The most important thing you can do is to make the contingency visible and get sign-off from your stakeholders (internal or external).

If your contingency is agreed you should keep it as a separate budget from that of your main project and the aim should not be to use it up or count it as profit on a project. Having contingency budget left at the end of a project will put you in the stakeholder’s good books.

Wendy Isaacs is Head of Project Management at True Clarity. Wendy is an experienced IT Project Manager with over 12 years experience managing a variety of projects with budgets of up to £2m. She is a Prince II Practitioner and a certified Scrum Master with hands on practical experience of waterfall and agile methodologies.

Article source: http://www.pmhut.com/project-management-how-much-contingency-do-i-need

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