10-3.3 Contingency funding & time buffers
Contingency funds are often established to cover project risks. When, where and the amount of money that will be spent will not be known until the risk event occurs. The amount of contingency reserves depends on the uncertainty inherent in the project, the organization culture, and how sponsors perceive the usefulness of contingency reserves. Contingency reserves can range anywhere from 1-10% of the project budget but can be as high as 20%. The contingency reserve is typically divided into budget reserves and managerial reserves for control purposes.
Budget Reserves – these are set up to cover identified risks and are allocated to specific segments or deliverables of the project or even work packages. For example, a reserve might be set aside for “computer coding” to cover the risk of “excessive testing” that needed for a new software development. The distribution of the reserves is normally the job of the project manager and team leaders responsible for implementing the work packages. Funds not used because the risk did not materialize are transferred to the budget reserve.
Management Reserves –These are set up to cover unidentified risks and are allocated to risks associated with the project as a whole. For a major scope change might necessary in the middle of the project. Because this was not previously identified, the cost is covered form the management reserve.
Time Buffers– In addition to contingency funds set up to cover unplanned costs, some organizations set up time buffers to cushion against potential project delays. We will come back to this when we talk about project schedules and the critical chain. Here also, the amount of time is dependent in the uncertainty inherent in project tasks and work packages. Using ideas from the Critical Chain, time buffers are established for:
- Activities with severe risks
- Merge activities from precedence relationships
- Non-critical activities that feed into the critical path
- Activities require scarce resources.