Contingency and managing risks

Traditional calculation

Somewhere along the line in the project initiation/formation process, the team assigned to the project will develop a project budget. This budget can be arrived by working tediously based of on requirements and deliverables of the project, breaking down into smaller workable units called work packages. This breakdown of work has a name in project management; work breakdown structure (WBS)

A simple WBS that can be used to derive contingency
The very basic WBS

There are many quirks associated with creating a WBS, namely because there is no standard way of making them. But that’s not the topic of focus today.

Once a WBS is established and setup, projects teams can work on estimating costs for the individual packages. Project budgets are nothing but these estimates added together with a contingency. But which amount should select? Right from the top of any sane person’s head it can be deduced that high priority projects should have a higher value. Higher backup amount is equivalent to more wiggle room to allow for changes, even scope changes. Traditionally speaking

Say you have many work packages (WP1, WP2, WP3… WPX) in your project, derived from a work breakdown structure. If you estimate a cost for all of these packages, you could assign an estimated cost for each individual work packages (C1,C2,C3…CX). Sum all those individual costs and you would get a cost estimate for your whole project.

These steps are all inline with good project management, but it is at his juncture that project teams go awry and drop all scientific reasoning and thinking and take arbitrary values into account. An almost universal 10% that is added to project estimates regardless of its complexity and priority. The following chart illustrates how it might be used up over a period of time for an example project

This practice to take care of scope changes might seem favorable initially as you are able to stick with the baseline budget. But as illustrated, the contingency can also be used up very quickly and towards the end of the project, you will need to revise the budget. A practice that seems more logical is to revise the baseline budget as scope changes happen and use contingency for managing risks and uncertainty associated with projects. A project doing so would not likely use up the available contingency

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