5.7.3 Advantages of Contingency Funding

In spite of these drawbacks, there are several advantages to the use of contingency funding for projects. They are as follows.

1. There is an explicit recognition that the future is fraught with uncertainty, and there is a potential for occurrences of risk events that can have a negative impact on the project budget. Spending over and above the allocated budgeted amount for the project is more common than underutilizing it. Project delays not only imply that the overall project is not likely to be completed on time, but also trigger a continuous drain on budget money. Contingency funds act as a cushion against both time and money variances in a project.

2. Very few projects are completed within their budgets and most overrun their targets, often by quite large amounts. This does not necessarily imply poor control, but rather the impossibility of anticipating all that will happen in the future, including potential problems that may emerge. Through contingency funding, provision is made in the company plans for these likely, but unexpected, increases in project cost. Application of contingency funding usually signals the onset of problems and the need to request top management for additional time, resource commitment, or budget money. The use of contingency funds in a project is often the first step for gaining approval for budget increases should they become necessary.

3. Use of contingency funds in a project is an early warning signal of a potentially overdrawn budget. When the contingency funds are being applied to the project, there is a clear message is that the normal operating budget for the project has been spent and there is a need for an alternative funding source. Application of contingency funds is a tell-tale sign that the project team is anticipating problems in the not-too-distant future. In the event of such signals, the organization's top management needs to take a serious look at the project, examine the reasons for its budget variance, and begin formulating alternate plans should the contingency funds prove to be insufficient to cover the project overspend.