Managing Project Contingency Funds

Contingency funds come in handy for mitigating project risk and handling unexpected issues. How much contingency funding do you need? And how do you manage it?  Here are some tips:

Consider the cost of risk responses. After creating your risk management plan, estimate how much money you need to address the project’s high-probability risks. If the project has few risks, you might do this for medium-probability risks, too. The total cost for addressing risks is your initial estimate for contingency funding. Then, work with your sponsor to adjust and recommend contingency funding for the project based on the overall level of risk present in the project. (For example, a project might have few medium to high probability risks, but scads of low probability ones. In that case, you might add contingency to cover low probability risk that do come to fruition.)

Align contingency funds with the project business case. Organizations usually have required payback times, cost savings or profit improvement targets that must be met for a project to be approved. Calculate the impact of contingency funding on those financial targets. Ideally, the project will still satisfy business case criteria after the addition of contingency funds to the budget. However, increased costs for handling risks or other unexpected costs may mean the project doesn’t satisfy those business criteria. If the contingency funds needed jeopardize the project’s business case, revisit the project approach and costs, or reconsider whether to pursue the project. 

Determine who can release contingency funds. Before the project gets going, decide when contingency funds will be released, who authorizes them, and in what circumstances they will be released. Traditionally, the sponsor releases contingency funds. However, giving the project manager access to these funds when specific risks occur can increase efficiency and reduce the impact to the project. Document the decisions you make regarding how contingency funding will be released, so you don’t encounter roadblocks accessing the funds.

Track and return funds to contingency when possible. Keep track of the contingency funds already spent and still available in your contingency budget. If parts of your project end up costing less than planned, you might recategorize those unspent project funds to replenish your contingency budget. 

For more about contingency, check out my Project Management Foundations course.