- Contingency Reserve: The cost or timeline that is allocated above the estimate to reduce the risk of potential overruns.
- Management Reserve: The cost or timeline that is allocated above the agreed upon project cost (including reserve) to account for situations that cannot be predicted. The typical examples are disruptions due to weather or economic changes.
A Project Manager is involved with all project reserves, but responsible for contingency reserve. The amount of contingency reserve depends on the project priority (scope, cost, schedule), risk, and stage the project is in. Once the required contingency budget and duration are defined, the next step is to incorporate that contingency into the project plan. I’ve found the best process is to spread the contingency across the project. An example of this for an IT project might be as follows:
phase to extend the phase and cost by the designated contingency amount. I added milestones to distinguish the phase completion without contingency and with contingency. The resulting schedule for the requirements phase would look like this:
When the phase begins, the next step is to set-up the phase for tracking. Perform the following at the start of each phase:
- Add a hard constraint on the contingency task to fix the end of the phase.
- Remove the dependency on the contingency task.
- Create a dependency from the “Phase without contingency complete” milestone to the “Phase with contingency complete” milestone. This will create a flexible end date as long as it doesn’t exceed the contingency duration.
- Add a deadline date on the “Phase without contingency complete” milestone equal to the finish or baseline date of the “Phase with contingency” milestone. This marks the committed phase finish date.
You are now ready to track progress for the requirements phase. The schedule now looks as follows:
Managing Phase Contingency
Task updates will cause changes to the schedule and cost.
- Modify contingency cost to compensate for changes in cost. Keep the total phase cost the same as long as you are within phase budget.
When Contingency is Exceeded
When the schedule extends past the phase end date, two events occur:
- The deadline indicator icon lets you know that the date is now exceeded.
- The schedule phase extends past the committed date, impacting the remaining project schedule.
For a cost overrun, once you reduce cost contingency to zero, any additional cost will begin to increase the phase and total project cost.
NOTE: This assumes that you do not dip into future phase contingency to compensate on the overruns of the current phase. Best practice is to recognize that your project is now considered at risk of going over budget and/or schedule, once these phase contingencies are exceeded.
Benefit of using this method
This method of managing contingency has several benefits, including:
- The team tracks to their original estimates and timeline for each phase.
- The rest of the project timeline remains stable as tasks are updated.
- The amount of contingency is managed so that it is not used-up prematurely.
There are certainly variations to this approach, as every project or organization has its own requirements. For instance:
- You could use a cost resource to track the contingency cost element.
- You could use a work resource that tracks both cost and effort. This might be more difficult, if a variety of resource rates are used.
- You could use a hard constraint on the “Phase plus contingency” milestone if you want more control over when you communicate schedule overrun. This will also create a schedule conflict warning when the phase duration is exceeded.
- One additional note: After writing this article, a blog entry came out with a variation on this solution using manually scheduled tasks. This option is described in the link: Buffer Using Manually Scheduled Task
If you like this method or have any suggestions, please let me know. This is one of many tips and best practices that I’ll be demonstrating during a three-part series on mastering Microsoft Project scheduling. You know the features of Microsoft Project, now it’s time to simplify and take control of managing your schedule.