5.7.2 Drawbacks of Contingency Funding*

Contingency funding is a contentious issue for many project organizations. Clearly, project teams support contingency funding as it is a viable tool for effective project cost control. However, their acceptance by project stakeholders, particularly by senior management and clients, is a thorny issue. The clients often feel that they are assuming additional expenses in the form of contingency funds for what was effectively poor control and mismanagement of the original project budget. Furthermore, many clients also feel that the methods used to calculate contingency funds are somewhat arbitrary. For example, it is not uncommon in the building industry to apply a contingency rate of 10 to 15% to any structure prior to architectural design. As a result, a building budgeted for $10 million dollars would be designed, at best, to cost $9 million. The additional million dollars is held in escrow as contingency against unforeseen difficulties during the construction. Consequently, it is not applied to the construction operating budget. The final point of contention with contingency often arises over the decision of where (which project activities) contingency should be applied. Does the contingency fund apply equally across all project work packages, or should it be held in reserve to support only some lesser set of critical activities? Clearly, the project team member whose activities receive additional contingency funding has an advantage over other team members receiving no monetary buffer.

All too often it is concluded by senior management on either the company or customer side that the contingency estimate, itself, must be wrong. Clearly, they reason, the planners and managers have put in excessive contingencies by making pessimistic assumptions that the problems that occurred on the last project will happen again . As most of the estimates represent the judgment of the individuals they can usually be "persuaded" by zealous board members to modify that judgment to something more acceptable. After downward revisions, contingencies are usually the next thing to go; they may be seen as a luxury provision for something that may never happen and if they are included they will be spent whether needed or not. Finally, arbitrary cuts may be applied to bring the budget down to an "acceptable" level. This depressing story will be only too familiar to many project managers.

*Please Note: Portions of section 5.7.2 were adapted from Pinto, J. K. (forthcoming). Project Management: Achieving Competitive Advantage. Upper Saddle River, NJ: Prentice Hall.Used with Permission.