Be Ready to Act
Tracking spending against contingencies as a project progresses can help project managers raise the red ;ag when too many risks have been realized. For instance, if 30 percent of
the project is complete but 75 percent of the contingency budget has been used up, it’s time
to discuss the possibility of a budget increase or scope reduction with the project sponsor.
“From my perspective, the most e;ective strategy for structuring the contingency
budget is at the phase level,” says Mr. Scruggs. With a software development project,
for instance, project execution might be broken into design, development and testing.
Each phase would be assigned its own contingency budget, so if the design phase proved
riskier—and more costly—than estimated, the project leader would be prepared to react
at that time.
If the team is using an agile approach, the project manager and sponsor could incorporate
contingency analysis into each iteration review. “;at allows them to pivot as needed, depending
on how the project is coming along,” Mr. Scruggs says. “It’s so important to have a sponsor who’s
not just committed to the project but also understands that there may be a scenario where the
scope needs to be decreased in order to stay within budget.” PM
Learn From the Past
No two projects are exactly alike. So
it’s impossible to use the same risk
formula for each initiative’s contingency budget.
“Every project has a unique nature,
requirements and context, so it doesn’t
make much sense to use a standard
percentage, like 5 percent or 10 per-
cent, to calculate contingency bud-
gets,” Ms. Al-Sherif says. “You have
to understand the project’s unique
risks, prioritize them and work on
the cost of your risk mitigation actions.”
Looking closely at past projects can help point project practitioners in
the right direction, Ms. Ferle says. Having a historical perspective on the
size of the contingency fund and how much of it was tapped during the
project can inform future estimates.
“In well-established project teams that develop software using known
technology, applying lessons learned from previous projects can be a great
resource for estimating contingency budgets,” she says. “But in projects
where a new technology is used or a new approach is introduced, there’s
more uncertainty with respect to contingency planning.”
When a project has a long R&D phase, untested technical aspects or is
making a foray into a new area, it can be harder to calculate contingencies
because there are fewer (or no) precedents to draw from. ;ese projects
are inherently riskier, which makes it all the more important that key
stakeholders, such as executives and the project sponsor, weigh in on the
risk register and how that will inform contingency planning.
“You have to
them and work on
the cost of your
—Jihan Al-Sherif, PMP