Every so often I’m asked questions about handling project finances. Here are a couple of questions from reader James about contingency budgets:
“In our construction project I put certain percentage of contingency into the budget for each individual job. This varies from one job to another in the budget, say 10% for job A, 8% for job B, 5 % for job C and etc. By adding each percentage, we can get to an overall figure, let's say $2 million. My questions are:
“1. When job A completed and no contingency budget for this job was used, (say we had $500k contingency set for this job), are we going to take out this $500k from total contingency budget and reduced it to $1.5
million for the rest of jobs, or should we still keep the $2 million as it is even though job A has completed successfully?
“2. When job A completed over budget by $600k ($500k contingency spent and $100k additional on top of the contingency budget), but at the same time there is still $200k contingency left for job B, can we offset job A's $100k by using the remaining amount in the contingency of job B, assuming job B also completed, or will not use full contingency as we predicted?”
Thanks, James, for getting in touch with your questions. My views on this are as follows.
If job A completed and did not use the contingency budget, you should release it. If the contingency was set aside for a specific task and that task is now completed, you no longer need it. That is the 'proper' way to do it, because contingency is linked to risk. I assume that other project tasks are no more risky now, so you don’t need to keep that contingency to offset increased risk on the project.
However, in real life if your project sponsor will allow you to keep the money and you think it will come in handy then hang on to it! You never know what is coming up later, but don’t assume that you can spend it just because you have it.
To answer your second question, if you have contingency per task then you shouldn't move it between one task and another. However, in real life (again) provided your sponsor is happy for you to do so then you can.
It sounds as if you actually have one pot of contingency money and are using it to offset changes as and when they occur, regardless of the task. This is fine: you do not have to have contingency per task, although you should have an idea about how much you need overall so that you don't spend all your contingency budget on the first task and
then have nothing left for later tasks.
Hope that helps!
If you have a question, drop me a line and I’ll try to include it next time. Or check out the previous episodes of the FAQ (links below) or the webinar on managing project budgets (which is free to watch).