Do you like surprises? The answer probably depends on the context.
You welcome surprises like lottery winnings and visits from an old friend.
But surprises like, “Hey, we need an extra $5,000 to finish this project that’s already started” are very unwelcome.
That’s where a contingency comes in.
What is a contingency?
Contingency, in a nutshell, is the cost of risk.
Contingency funds are built into your project budget to pay for the unexpected.
Adequate contingencies are necessary for delivering projects on time, on scope, and within budget.
No project plan is 100% perfect. But a good project manager should get you close. And – we might be partial – but if your project manager is Steve, then your plan is as close to perfect as it gets.
Contingency closes the gap between the project plan and the reality of execution.
Building adequate contingency into project budgets allows for more accurate budgeting and successfully delivering projects on time and within budget.
Uses for contingency include increased fuel, shipping, or hardware costs, as well as weather delays, an incorrect part, or unplanned supplies.
Contingency funds allow the project manager to react to these unexpected needs without making additional budget requests to management.
What is not a contingency?
Contingencies pay for unexpected elements necessary to complete a project within its pre-defined scope and timeline.
Contingencies are not extra budget. They are also not a way for your vendor to generate extra profit.
As a project comes closer to its end, you could re-allocate unused contingency budget to other items. However, the project manager or project vendor is not authorized to use contingency in ways that are out of scope.
Calculating Contingency
Accurate contingency requires a good understanding of possible risks to the project.
The Project Management Institute has dozens of resources on contingency planning. And professional project managers can get deep in the weeds of things precise calculations for the monetary value of risk exposure, estimate uncertainty, and risk probability.
But, in simple terms, here’s what you need to consider in your contingency estimate:
- How confident are you in the accuracy of your cost estimate?
- How likely is it that the costs included in your estimate will change?
- What are the odds of an unexpected event impacting project costs?
- How much of an impact could the above have on your project?
To put that into perspective, according to the Project Management Institute, typical IT project contingencies range from 15-25% of the project budget.
How does Innovative handle contingencies?
Innovative includes a minimum 5% project contingency on project quotes when possible.
So, if PMI says typical IT contingencies are between 15 and 25%, why does Innovative start contingencies as 5%?
Innovative has the luxury of 21 years of project data. We’ve won and lost the project profitability game. So, we’ve perfected systems based on historical data from comparable projects that make us pretty accurate with our cost estimates.
For example, we know that the average PC install project takes 4 hours of labor per PC. However, after we install a baseline number of PCs in your specific environment, we’ll generate an average PC labor cost for your particular company. Meaning you might pay for more than 4 hours, or you might pay less depending on your specific requirements.
With our level of historical data, we can tell you that a 5% contingency is a pretty safe bet for the types of projects we implement regularly.
However, we may occasionally quote 10%, 15%, or even 25% contingency when our experience and data tell us your project is at greater risk to outside cost impacts than is our standard.
What happens when Innovative includes contingency in a project quote?
When you sign a project quote that includes a contingency line item, you’re authorizing Innovative to bill you the total value of the quote, including the full value of the contingency.
Your final invoice will include the quoted project costs of hardware and labor, plus the actual portion of the contingency used. This could be $0 billed for contingency, the total quoted contingency, or any amount in between.
Don’t Skip the Contingency
Including contingency in IT projects protects you from unplanned project costs and delays associated with unexpected expenses. Be sure you’re having conversations about appropriate contingency budgets with your IT partner when planning for any IT project.
