5.7 Developing a Project Contingency Budget*

A project contingency budget is created to offset the uncertainty associated with projects. Projects are often plagued by unforeseen events that can cause initial project budgets to be inaccurate and meaningless. For example, suppose a construction project that had budgeted a fixed amount for digging a building's foundation accidentally discovered serious subsidence problems or ground water. The project, facing these serious and unexpected events, would find itself facing serious budgetary problems when they attempted to develop solutions. Budget contingencies symbolize the recognition that project cost estimates are just that: estimates. Even in circumstances in which project unknowns are kept to a minimum, there is simply no such thing as a project developed with the luxury of full knowledge of events. Hence, project teams routinely adopt an extra budgeted amount designed to cover these project uncertainties--the budget contingency. The amount to be earmarked as contingency funds in a project budget varies with the level of uncertainty. The higher the uncertainty associated with the project, the greater the amount allotted as contingency funds.

The purpose of including contingency funds to the budget is to simply ensure that unforeseen events do not delay project completion. They are also intended to offset errors associated with estimation, minor design changes and other omissions. The allocation of contingency funds increases the chances of the work being done within the stipulated amount and thus the confidence attached to it. If that confidence can be raised to a point where the amount seems both realistic and achievable, then its value as a control tool increases significantly.

*Please Note: Portions of section 4.7 were adapted from Pinto, J. K. (forthcoming). Project Management: Achieving Competitive Advantage. Upper Saddle River, NJ: Prentice Hall.Used with Permission.