Every large capital project will have unplanned and unexpected costs because it’s simply impossible to foresee and plan for every unknown. Successful project leaders focus on identifying and controlling costs and avoid having to approach the Project Stakeholders and request additional funding. So how do we, as project managers and leaders, determine how much funding should be allocated as contingency for a particular project? Is it 5%, 15%, 25%?
Unfortunately there’s no simple fixed percent rule that will always tell us how much money to allocate for the unplanned and unknown. But with an analytical approach it’s possible to make a reasonable estimate. Here are a few key items you may want to consider in determining your contingency allocation:
If you haven’t created a project risk register, consider assembling one. Identify as many potential risks as you can that would have a significant impact on your project. Ask questions such as:
- What assumptions were made?
- What delays could occur?
- Are you using all new equipment or trying to refurbish that old machine?
- Could you need to upgrade utilities to support your new equipment?
- How much non-familiar technology is involved?
- Is the project relatively simple or complex?
Next, consider the likelihood of each risk event and the impact if it occurs. From this, you can make a reasonable estimate of the financial impact of each risk and consider it in your contingency allowance.
Project Estimate Accuracy
Are your cost estimates for equipment, materials, and labor/services based on internal estimates, budgetary quotes or procurement level quotes? What is the experience and skill level of the estimator? What estimating techniques were used? The AACE (Association for the Advancement of Cost Engineering) has a published the following cost estimate classification which may be helpful in thinking about the accuracy of your project estimate.
Evaluate what level of accuracy you have at the time of project funding and consider adding contingency to specific project elements based on your assessment.
If you have experience with a similar project you may have some additional keen insight to real costs and expectations that you might not otherwise. Consider the things that impacted previous projects you or your company have worked on.
Unknown and Undefined
At the time of project funding some project elements are simply unknown and/or undefined yet. And experienced project managers will tell you that there is always something that comes up during the execution of a project that will need additional funding to address. Be sure to allocate some contingency funds for these things as well.
Once you have considered these factors and estimated your potential risks and costs you should have a much better idea of the right amount of contingency for your project. Haskell always includes these in project budget development and considers this approach part of our best practices. Haskell has extensive experience in systems integration and project management and would be glad to be part of your next project team.
If you'd like to discuss Haskell's approach to project management and cost estimating, contact Doug Wear, Sr. Engineering Manager, at email@example.com.