Setting up a contingency element as part of the project cost is nowadays a common practice in project management. It can be derived by various methods including advanced statistical (Monte Carlo) methods. However, because it is so intrinsically linked to profit recognition, the contingency element is not always properly managed throughout project execution, leading to unpleasant surprises for the organization. Our new White Paper 2014-09 exposes good practices and some typical shortcomings that are commonly observed.

Contingency is a very particular cost element. Contingency is reforecast using the relevant project risk management process. This tricky cost element attracts a lot of attention from management, so that the contingency update needs to be supported by a clear and shared risk management process. Notwithstanding the process chosen to determine contingency, it should generally decrease as the project progresses, because it addresses future risks.

It is not a recommended practice to release contingency to compensate for higher costs compared to the budget. Contingency should only be used to compensate for exceptional events that are external and beyond the normal control of the Project Manager. Beyond those exceptional events, release of contingency by senior management should only be the result of an appreciation on the residual risk of the project moving forward, not on the poor estimate of costs that have already been spent.

Understand what are the proper practices of contingency management in our new White Paper 2014-09 “How to Manage Properly Your Project Contingency Throughout Project Execution” !