Contingency reserves are funds intended to be used to offset the negative financial impacts of realized risks. On schedules, we often use the alternate term buffer but we are really referencing the same concept.
Depending on the project funding policies of a given company, project managers may have the ability to directly authorize contingency drawdowns, as they are a component of your approved cost & schedule baselines.
But just because a project manager has the authority to utilize contingency without seeking additional approvals doesn’t mean that it shouldn’t be tracked and reported separately.
While contingency is supposed to be used to reduce impacts from realized risks, it can also be used to mask scope creep or to avoid going through project change management. I realize that there is often a very fine line between the realized risk of a missed requirement and scope change, but some project managers and sponsors treat contingency like a slush fund.
Preventing contingency misuse is a good reason to track and report on its usage, but a more valuable one is that contingency usage complements earned value practices by providing a leading indicator of future variances.
If we have consumed more than half of our approved contingency on a project where the risk distribution is even across its lifecycle, we should ideally have delivered more than half of the approved scope. If we’ve completed much less, that might be an indicator of one of the following root causes.
- The project’s risk profile & distribution is worse than assessed
- Risk impacts have been underestimated
- Scope creep is happening
Further investigation is then warranted.
Another good practice is to tie contingency amounts to risk events associated with specific work packages or achievement of key milestones – that will both reduce the opportunity cost (and greater chance of misuse) of contingency held long past its need and will also provide an early warning sign for those work packages.
Contingency provides us with another project management example of Uncle Ben’s caution “With great power, comes great responsibility“.