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Contingency (and Management Reserve)

Contingency is the cost or time added to a project's base estimate or schedule to cover identified risks and estimating uncertainty within the agreed scope. It is best sized from a quantitative risk analysis, as the difference between a confidence level such as P80 and the base estimate, rather than as a flat percentage.

Contingency versus management reserve

ContingencyManagement reserve
CoversIdentified risks and estimating uncertainty (known unknowns)Unforeseen events and residual risk (unknown unknowns)
Held byProject manager or project directorSponsor or owner
Typical sizingP80 minus base estimateP90 minus P80, or a policy allowance
Part of the budget baseline?YesUsually no

Worked example

Base estimate $120m. QCRA results: P80 $133m, P90 $137m.

  • Contingency = $133m − $120m = $13m (10.8%)
  • Management reserve = $137m − $133m = $4m
  • Total funding at P90 = $137m

Schedule contingency

The same logic applies to time. Schedule contingency is the gap between the deterministic finish date and the P80 date from a QSRA. It should sit as a visible buffer ahead of a key milestone, not be hidden inside activity durations where it gets used up.

Why flat percentages fail

A 10% allowance is too much for a repeat build with mature design and far too little for a brownfield tie-in in a shutdown window. Two projects with the same base estimate can need very different contingency. Only a model of each project's own risks tells you which.

Common mistakes

  • Double counting: padding the base estimate and then adding contingency on top.
  • Spreading contingency into line items, where it is spent rather than managed.
  • Never drawing it down: contingency should reduce as risks close; if it does not, it is not being managed.

Related terms

P80P90Quantitative risk assessmentQSRAThree-point estimateFull glossary
Go deeper
How to calculate cost contingency: a defensible QCRA method

Frequently asked questions

What is contingency in a project?
Contingency is the cost or time added to cover identified risks and estimating uncertainty within scope. It is best sized from a quantitative risk analysis.
What is the difference between contingency and management reserve?
Contingency covers identified risks and is managed by the project. Management reserve covers unforeseen events and is held by the sponsor, usually outside the budget baseline.
How much contingency should a project have?
There is no fixed percentage. Size it as the P80 cost minus the base estimate from a quantitative cost risk analysis of the project's own risks.

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