FROM THE DESK OF: Dick Troell, P.E.
CONTINGENCY – What is it? (Part 1)
Of all the terms applicable to projects, one is maligned, cursed, misunderstood, misapplied, misused, and otherwise ill-treated far more than any other. That term is Contingency. If ten project professionals were asked to give their definition of contingency, most certainly there would be at least eleven responses. Let’s take a look at what contingency is and what it isn’t. Then, we should be in a position to come to some conclusions about this important term.
Contingency is not:
• A checkbook to pay for changes
• Intended to cover scope type changes to a project
• A standard number (percentage) added to the estimate or schedule
• A resolution allowance
On the other hand, contingency is:
• A bottom line addition to an estimate (time or money) to arrive at the most likely cost (time or money) for a project
• An estimate of what is not known, in detail, at the time of the estimate (cost or schedule)
• An estimate of the risk involved in the project
• An amount that is expected to be “used” by project’s end – in other words, at project closure, contingency should be zero (there is nothing unknown and no risk remaining – so, until project closure, there should be some amount of contingency)
• Is most appropriately estimated using a standard system (program or algorithm) which evaluates unknowns and risks
• To be applied to design and construction changes within the scope of the project
So, based on these descriptions of contingency, a definition of what it really is can be formulated.
Contingency is a bottom line addition to an estimate (time or money), that appropriately estimates the effect on the project (cost and schedule) of unknowns and risks, that yields the most likely final cost and schedule time for the project.
If this definition is accepted, then the full amount of the contingency should be expected to be utilized during the life of the project. At project end, there will be nothing left in the contingency category (time or money), as it will have been either spent or released.
In future articles, we will look at contingency estimating, release, etc. for a more complete understanding of how it is determined and applied during a project life cycle.