5.7.1 Allocation of Contingency Funds

Contingency money can be added to individual project activities, work packages, or to the project as a whole. Contingency fund allocation is not part of project's budget activity-based costing process. Instead, it is an amount allocated over and above the calculated cost of the project. Some organizations adopt a formal approach to the allocation of contingency funds and include a structured build-up within the project budget as shown in Figure 4.3. Individual task budgets are set at a level that, in the view of the estimator and the manager responsible for the task, is reasonable for the defined work. This will be the budget issued to the personnel required to perform the task. Several minor tasks can come together to form a major task or work package. In addition, by either a rule-of-thumb or a risk assessment method, a contingency is added to the budget to cover underestimates due to unforeseen difficulties in all the minor tasks. The work package manager may, in theory, control the use of contingency to accommodate any overruns.

Figure 5.3 Build up and Allocation of Contingency Funds to Various Budgets