What is Contingency?
Estimation errors are a frequent cause of headaches for project managers and usually occur when planning assumptions are proven incorrect. For example estimation of time or cost in a traditional project might be based on an assumption dependencies are managed. In an Agile Project, story point estimation might be assumed based on a developer’s experience with something similar in the past rather than the new architecture in the current project. There is therefore a risk that these assumptions or guesses are wrong and there is more time, money, resource etc. required. A risk mitigation technique can be to add ‘contingency’ to the estimate and allow for easy management of changes. A Contingency Plan is being a bit more specific about the event that could result in a change to the original estimate and have a tailored, pre-agreed response. This will allow a Project Manager more freedom to manage variables within the project without excessive governance.
Firstly, it is important to acknowledge up front that contingency, like many other concepts in Project Management, has multiple different applications across different project types and methodologies. Some may see it as a ‘waterfall project thing’ and have a different use of the concept entirely. Others perhaps overuse it and end up with an inflated estimate, which has been added just to avoid risks entirely (before they are known). This article is a point of view of the different types of contingency and how to apply these concepts to your projects.
Types of contingency in Projects
1. Estimation Contingency
- Effectively a way of accounting for the many unknowns that exist in projects whether they are Waterfall or Agile however applies the concept directly to a particular project attribute such as a schedule, resource plan, cost plan or release plan.
- Estimation contingency still needs some science applied however not just add a ‘buffer’.
- An example could be that the Project has a planned release date (with resource pans and cost etc. being based on that being realised) however could pre-agree a ‘Plan B’ release date which should a worst case scenario come to pass.
2. Innovation or Design contingency
- This approach assumes the Project Management processes will manage many of the estimation unknowns through iterations and regular recalibration.
- Instead contingency is added for Spikes or exploration activities which may be required when implementing a certain technology for the first time or unknowns related to integration.
What is a Contingency Plan?
Contingency Plans are critical aspects of any business and have an increasingly higher profile with the adoption of new technologies (regulators will look for contingency plans based on cloud services for example) or external event. Essentially Contingency Plans are ‘what if’ scenarios based on specific events, which establish the ‘play book’ to follow should that event (and assumed impacts) come to pass.
Projects are no different and whether they are Waterfall or Agile, will have a certain amount of unknowns, which in turn will create risk to the project outcomes. Contingency Plans allow a Project Manager to develop scenarios based on these unknowns which will allow for simpler management should a worst case scenario occur.
As an example, there could be an unknown related to integration with a third party service provider given the project has not received a definitive estimate of development. The Project will estimate based on the available or known data at the time however have a risk that the third-party could add a lot more development if the integration is more complex. The Project Manager can establish a contingency plan which establishes a ‘reserve’ to manage this scenario or could have a contingency timeline to complete that work – a ‘Plan B’ if you like.
Not every project needs a Contingency Plan, however if there are a lot of unknowns on a project it can really help to have a clear strategy to manage them. Where there are strict constraints on a project and a Project Manager has to apply to a Project Sponsor for any changes (even if forecast in a risk) having a pre-agreed Contingency Plan can also allow for empowerment at Project team level to execute an update to the plan and move forward quickly.
Contingency Plan FAQs
What is a contingency plan?
Contingency plans are ‘what if’ scenarios based on specific events, that establish the ‘play book’ to follow should that event (and assumed impacts) occur.
What is a contingency plan example?
For example there could be an unknown related to integration with a third party service provider given the project has not received a definitive estimate of development.
The Project will estimate based on the available data at the time however there is a risk that the third-party could require a lot more development effort if the integration is more complex. The Project Manager can establish a contingency plan which provides a ‘reserve’ to manage this scenario or could have a contingency timeline to complete the work.
What is contingency in project management?
There are 2 types of contingency in projects:
- Estimation contingency
Applies the concept directly to a particular project attribute such as a schedule, resource plan, cost plan or release plan.
2. Innovation (Design) contingency
Assumes the Project Management processes will manage many of the estimation unknowns through iterations and regular recalibration.