- No one really knows because they can’t track scope, progress or costs well enough to really know, and / or
- They put so much time and cost contingency into the project that anyone who is late or over budget really must have screwed up.
In addition, (and maybe a #3 here) the contingency is often assigned as a rule-of-thumb of simply 20% of project duration and cost.
There are several problems here, covered up and masked from Executives:
- Even after all of the typical discipline that is applied to planning, significant costs and time are fudged into the project. This does not account for differences in risks in each project,
- With over-allocated contingency, capital is stock-piled in a project, when it could be freed up and applied to other projects,
- Once that money is allocated to a project, it is going to be spent and there is no getting it back. Because that money is hidden in contingency and doled out as necessary, it is hard or even impossible to track where it went.
- Same goes for time, once extra time is allocated to a project, it is hard to claw it back. Similar to a school assignment, your project will take as much time as you allow it to take,
Two solutions come to mind to solve these problems and free up time and cost contingencies:
- Apply qualitative and quantitative risk analysis to determine how much time and cost contingency you are really going to need in a project, and further to help you target your risk mitigation efforts. With risk mitigation efforts you can establish strategies to “buy your risk”. That means that you create contract management, supply chain management, transportation, and other solutions that will help you lower or eliminate risks. Essentially you spend a portion of your contingency up-front in your project to avoid or substantially reduce the risks. Qualitative and quantitative risk analysis will help you ensure that you accurately estimate the contingency cost and time you need for your project. This can free up capital for use on other projects.
- Track & manage project issues and the related costs and schedule implications that result in “surprise” costs and time delays. These project issues are typically locked in manual business processes and include important things like vendor & contract management, design reviews, RFIs, change requests, incidents, meeting & correspondence actions, punchlists, and submittals & transmittals. These should be tracked and the cost and schedule information should be available in real-time for reports and dashboards. Additionally, the responsibility and accountability, and consequently the ownership of action items from the business process should be available for each action owner, and the project management team. At the same time, because a “stuck” item in a business processes (e.g. things that aren’t reviewed, answered, revised, approved) can delay a work package, and ultimately a project, items that are “stuck” need appropriate escalations and delegation so that they get actioned and completed as quickly as possible. Tightly managing and controlling your business processes, and the associated costs and time impacts, will help you know when you are in jeopardy, and consequently will help you reduce the amount of cost and time that otherwise simply slips away into contingency if it is left on its own.
In the next two posts, I'll discuss two software solutions that help you actually do risk analysis and business process management for projects.
Here’s a set of quick links to this series:
- Never late or over budget? Really? You’re wasting time and money.
- Risk analysis to ensure accurate contingency allocations (& save project time & money)
- Business Process Discipline to track issues to completion (& save project time & money)
(Watch for these links to be updated as I roll-out more posts.)
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Have a look at my index of posts for more on EPPM strategies and tactics.