Contingency and managing risks

Contingency and risks

So what exactly should contingency cover? Contingency can cover two things both which are related to risks in a sense of manner.

Contingency can be used to account for the degree of accuracy associated with different work packages. Towards the end of your project planning, you should have cost estimates that are within the 5% variability (or 95% accurate estimates). Any change to this estimate happening during project implementation can be, theoretically, covered by contingency. Remember that this change in estimates cannot be a change in scope

Risks are events that may or may not take place in the near future. More specifically projects are made up of known knowns, known unknowns and unknown unknowns. Known knowns are the baseline cost estimates. Known unknowns are events that you have forecasted as possible to occur and things that you have a plan to adhere to, once they eventuate. Unknown unknowns are things that cannot be predicted with any certainty and completely unforeseen. Risk events, once occurred needs to be treated to an acceptable level and the cost of treatment is covered by contingencies

Once you start to think of contingency in this manner, you see how crude assigning an arbitrary percentage for contingency really is. 10% contingency is not a rule of thumb, nor is it a value derived from any research into the subject. Calculating contingency based on the degree of variability in estimates and costs associated with risks allow you to calculate a more sensible value, and more importantly, a confidence level to your contingency. For example, you could present contingency to higher managers with, for example, 80% chance of finishing within budget.

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