Comment & Question 1 I enjoyed reading your narrative. I want to add to your point that contingencies are necessary in any project and tracked outside the project budget estimate, this way we are able to understand the actual baseline cost of the project and the different risks and unknowns impact to the project in the form of contingency funding. It is true that the project manager and upper management will always conflict on the contingency funds, but this is always the case when the project manager does not carry the team along on the definition and identification of project risks for the sake of contingency funding. It is true that buffering project budget estimates, project bids and contingencies could lead to a loss in a bid or project hence one must avoid \"buffering\" of project estimates, bids and contingencies. It is better to provide estimates individually for a bid, project or contingency than making yourself look good by buffering the project budget with future contingencies. This will definitely help build team trust. What do you think about creating individual estimates for projects, bids and contingencies instead of buffering? References: A Guide to the Project Management Body of Knowledge (PMBOK Guide). (2015). Newtown, Pennsylvania: Project Management Institute, Inc. (pp. 213) Cioffi, Df ; Khamooshi, H. (2009). A practical method of determining project risk contingency budgets. Journal Of The Operational Research Society, Vol.60 (4), pp.565571 Comments & Question# 2 As you stated, contingency funds are funds set aside for the project to respond to known unknown risk events. I think it is important to note that contingency reserves are only set aside to respond to risk events that were accepted and then quantified by the project (PMBOK, 2013). This means project managers must guard against practices that \"have the maximum amount set aside\" to cater for all known contingencies. Calculating contingency estimates must be simple if they are to remain relevant to stakeholders (Barraza, 2007). Calculating each accepted contingency cost in this way should allow a project manager to defend their contingency estimate. References Barraza, G.A. (2007). Cost contingency management. Journal of management in engineering, July 2007, 140146 Project Management Institute. (2013). A guide to the project management body of knowledge (PMBOK guide). Ed 5. Newton Square: Project Management Institute. p. 206 Comments & Question 3 You're right. There may be many conflicting ideas and interests regarding contingency funds among stakeholders. My question is what can be done if the sponsors don't wish to fork over the contingency funds? I would assume that this scenario most likely happens on projects that have large contingency fund needs, and thus, many risks in the project. In such a situation, what do you think about requesting a contingency fund, but letting the sponsor hold its purse strings? This would: a.) ensure that adequate contingency funds exist without cutting the fund out entirely, b.) give the sponsor peace of mind that the contingency funds aren't being used improperly, and c.) ensure that the sponsors are made aware of any realized risks and will help them realize in the end, why the budget required extra funding. It would however require another component of interaction and communication for the team but maybe it's worth the extra trouble? The New South Whales government has already adopted a form of this practice. For large (over $100 million) projects that are high risk, the contingency fund is managed by a treasurer, not the project manager. Granted, not all sponsors have access to a treasurer or treasury skills, but I think it might be a possible solution under extreme circumstances. Do you have any other ideas as how to handle sponsors who don't want to fork over contingency funding? Resource: NSW Government (Oct., 2014). \"Management of Contingency Provisions for Major Porjects\" The Treasurery. Retrieved on 5/24/15 from: http://www.treasury.nsw.gov.au/__data/assets/pdf_file/0014/125141/NSWTC14 29_Management_of_Contingency_Provisions_for_Major_Projects.pdf Reply Quote Email Author Discussion Topic on Contingency Funds Contingency funds are built into the project estimates to account for uncertainty. A classic example is the possibility of increase in raw material costs. Thus, building a contingency reserve into the estimates for the project costs helps to cope with such uncertainties or known unknowns as they are called. The amount or percentage of contingency reserve to be built into the project depends upon the level of risk faced by the project. The project manager would use techniques of risk analysis or history of similar past projects to estimate the amount of contingencies required (pmtips, 2015). There is generally always a conflict between the project manager and the client or upper management as to the amount of contingency reserves to be added to the project budget. The basic reason for the conflict is straight forward. The top management or client is looking to reduce the overall budget allocation towards the project while the project manager wishes to have maximum amount set aside so that the project does not get affected in case of contingencies (Google Books, 2015). The project manager has to convincingly justify the amount of contingencies built into the budget. Instead of acting on gut feeling, it is a better idea to use scientific techniques and have a sound basis for these reserves. At the same time, overestimation of contingencies can result in loss of bid. In case of project bids, the management wishes to place the minimum bid so as to obtain the project bid (Hart, 2007). The contingency reserve is one area which can be reduced to reduce the overall cost for the project. References pmtips,. (2015). Project Financial Management: Contingency. Retrieved 21 May 2015, from http://pmtips.net/Blog/project-financial-management-contingency Google Books,. (2015). Project Risk Analysis and Management Guide. Retrieved 21 May 2015, from https://books.google.co.in/books? id=_gJHsyQah98C&pg=PA7&lpg=PA7&dq=contingency+fund+in+project+budget+conflict+betw een+manager+and+client&source=bl&ots=uzpFaHBirN&sig=UEKjY17AnQAvoe64tBBY0bKNNo&hl=en&sa=X&ei=TS9dVae8L86ouwSqnoKwBw&ved=0CB0Q6AEw AA#v=onepage&q=contingency%20fund%20in%20project%20budget%20conflict%20between %20manager%20and%20client&f=false Hart, D. (2007). Managing the Contingency Allowance (1st ed., p. 2). AIA. Retrieved from http://www.aia.org/aiaucmp/groups/secure/documents/pdf/aiap026970.pdf Comment & Question 1 I enjoyed reading your narrative. I want to add to your point that contingencies are necessary in any project and tracked outside the project budget estimate, this way we are able to understand the actual baseline cost of the project and the different risks and unknowns impact to the project in the form of contingency funding. It is true that the project manager and upper management will always conflict on the contingency funds, but this is always the case when the project manager does not carry the team along on the definition and identification of project risks for the sake of contingency funding. It is true that buffering project budget estimates, project bids and contingencies could lead to a loss in a bid or project hence one must avoid \"buffering\" of project estimates, bids and contingencies. It is better to provide estimates individually for a bid, project or contingency than making yourself look good by buffering the project budget with future contingencies. This will definitely help build team trust. What do you think about creating individual estimates for projects, bids and contingencies instead of buffering? Answer: It is true; Conflicts occurs often between PMO and Finance/leadership management groups when it comes to project budget and keeping funds in buffer for future purpose or for contingency buffers to save for a Rainy Day. This all depends on different methods with planning in respective of type of projects and stakeholders that are being handled. Instead of fixing formulas, you estimate a distribution for each element using "MonteCarlo analysis or PERT" where Critical chain project management uses a approach to size buffers (the square root of the sum of squares, or SSQ method); a tecnique that pool the variance from individual task estimates and strategical phased distributed method using Agile Project Estimation and planning where stakeholders, finance leadership committe gets the project being divided in the each different element with funds being divided equally with resources and projects get reviewed, audited and meet the compliance cadence of release and standards where each party is accountable and recognized with no conflicts in communication and management. Reference: Larry Leach, "Schedule and Cost Buffer Sizing" from http://www.npd solutions.com/Schedule&CostBufferSizing.pdf Steven Thoms. " Agile Project Estimating" from http://itsadeliverything.com/agileprojectestimating References: A Guide to the Project Management Body of Knowledge (PMBOK Guide). (2015). Newtown, Pennsylvania: Project Management Institute, Inc. (pp. 213) Cioffi, Df ; Khamooshi, H. (2009). A practical method of determining project risk contingency budgets. Journal Of The Operational Research Society, Vol.60 (4), pp.565571 Comments & Question# 2 As you stated, contingency funds are funds set aside for the project to respond to known unknown risk events. I think it is important to note that contingency reserves are only set aside to respond to risk events that were accepted and then quantified by the project (PMBOK, 2013). This means project managers must guard against practices that \"have the maximum amount set aside\" to cater for all known contingencies. Calculating contingency estimates must be simple if they are to remain relevant to stakeholders (Barraza, 2007). Calculating each accepted contingency cost in this way should allow a project manager to defend their contingency estimate. References Barraza, G.A. (2007). Cost contingency management. Journal of management in engineering, July 2007, 140146 Project Management Institute. (2013). A guide to the project management body of knowledge (PMBOK guide). Ed 5. Newton Square: Project Management Institute. p. 206 Comments & Question 3 You're right. There may be many conflicting ideas and interests regarding contingency funds among stakeholders. My question is what can be done if the sponsors don't wish to fork over the contingency funds? I would assume that this scenario most likely happens on projects that have large contingency fund needs, and thus, many risks in the project. In such a situation, what do you think about requesting a contingency fund, but letting the sponsor hold its purse strings? This would: a.) ensure that adequate contingency funds exist without cutting the fund out entirely, b.) give the sponsor peace of mind that the contingency funds aren't being used improperly, and c.) ensure that the sponsors are made aware of any realized risks and will help them realize in the end, why the budget required extra funding. It would however require another component of interaction and communication for the team but maybe it's worth the extra trouble? The New South Whales government has already adopted a form of this practice. For large (over $100 million) projects that are high risk, the contingency fund is managed by a treasurer, not the project manager. Granted, not all sponsors have access to a treasurer or treasury skills, but I think it might be a possible solution under extreme circumstances. Do you have any other ideas as how to handle sponsors who don't want to fork over contingency funding? Resource: NSW Government (Oct., 2014). \"Management of Contingency Provisions for Major Porjects\" The Treasurery. Retrieved on 5/24/15 from: http://www.treasury.nsw.gov.au/__data/assets/pdf_file/0014/125141/NSWTC14 29_Management_of_Contingency_Provisions_for_Major_Projects.pdf Reply Quote Email Author