At many of the training sessions I’ve taught I’ve received a lot of questions about how to handle contingency. This is a great topic to share. Let’s start with a short explanation of the different types of contingency. Sources may differ, but they tend to define two general types of contingency:
- Contingency reserve: The cost or timeline that’s allocated above the estimate to reduce the risk of potential overruns.
- Management reserve: The cost or timeline allocated above the agreed upon project cost (including reserve) to account for situations that can’t be predicted. The typical examples are disruptions due to weather or economic changes.
Another type of contingency worth mentioning is risk exposure. Some argue that this is the same as contingency reserve, but it assumes that you’re able to identify all of the known unknowns. In my experience, I’ve found that most organizations don’t quantify and manage risk closely enough to be able to rely on this formula alone.
A project manager is involved with all project reserves, but responsible for contingency reserve. The amount of contingency reserve depends on the project priority (scope, cost, schedule), risk, and stage the project is in. Once the required contingency budget and duration are defined, the next step is to incorporate that contingency into the project plan. I’ve found the best process is to spread the contingency across the project. An example of this for an IT project might be as follows:
The first step to add contingency into your project is to determine how much of the total contingency should be allocated to each major phase or deliverable. Then, use a separate task at the end of each phase to extend the phase and cost by the designated contingency amount. I added milestones to distinguish the phase completion without contingency and with contingency. The resulting schedule for the requirements phase would look like this:Project Set-up
When the phase begins, the next step is to set-up the phase for tracking. Perform the following at the start of each phase:
- Add a hard constraint on the contingency task to fix the end of the phase.
- Remove the dependency on the contingency task.
- Create a dependency from the “Phase without contingency complete” milestone to the “Phase with contingency complete” milestone. This will create a flexible end date as long as it doesn’t exceed the contingency duration.
- Add a deadline date on the “Phase without contingency complete” milestone equal to the finish or baseline date of the “Phase with contingency” milestone. This marks the committed phase finish date.
You are now ready to track progress for the requirements phase. The schedule now looks as follows:
Managing Phase Contingency
Task updates will cause changes to the schedule and cost.
- Modify contingency cost to compensate for changes in cost. Keep the total phase cost the same as long as you are within phase budget.
- Schedule contingency will flex as long as the schedule is within the contingency duration. You can utilize the Total Slack or Finish Slack to indicate how much duration you have left.
When Contingency is Exceeded
When the schedule extends past the phase end date, two events occur:
- The deadline indicator icon lets you know that the date is now exceeded.
- The schedule phase extends past the committed date, impacting the remaining project schedule.
For a cost overrun, once you reduce cost contingency to zero, any additional cost will begin to increase the phase and total project cost.
Note: This assumes that you don’t dip into future phase contingency to compensate on the overruns of the current phase. Best practice is to recognize that your project is now considered at risk of going over budget and/or schedule, once these phase contingencies are exceeded.
This method of managing contingency has several benefits, including:
- The team tracks to its original estimates and timeline for each phase.
- The rest of the project timeline remains stable as tasks are updated.
- The amount of contingency is managed so that it’s not used-up prematurely.
Variations on a Theme
There are certainly variations to this approach, as every project or organization has its own requirements. For instance:
- You could use a cost resource to track the contingency cost element.
- You could use a work resource that tracks both cost and effort. This might be more difficult, if a variety of resource rates are used.
- You could use a hard constraint on the “Phase plus contingency” milestone if you want more control over when you communicate schedule overrun. This will also create a schedule conflict warning when the phase duration is exceeded.
One additional note: After writing this article, a blog entry, “Add a Buffer Task using a Manually Scheduled Task,” came out with a variation on this solution using manually scheduled tasks.
If you like this method or have any suggestions, please let me know. You know the features of Microsoft Project. Now it’s time to simplify and take control of managing your schedule.