Con.tin.gen.cy | kənˈtɪndʒ(ə)nsi
noun: A future event or circumstance which is possible but cannot be predicted with certainty
To give ourselves the best chance of delivering a profitable project, we need to ensure they're quoted accurately in the first place. This is especially true if we’re delivering the project for a fixed price.
To do that, we need to predict what’s going to happen as accurately as possible. Planning how the project will unfold, how the client will behave, what actions any other parties will take … they all contribute to developing an accurate—and profitable—quote.
Needless to say, uncertainty is not our friend.
It’s not possible to predict everything that’s going to happen during a project, especially if we’re working with a new client. We don’t know how they treat suppliers. We don’t know whether they’re the kind of client who leaves you to get on with your work, or the sort who can’t let go and needs an update call every couple of days—it’s amazing how many projects we see go over budget purely because no-one expected the client to require so much attention.
And then there are outside factors too. For example, if we’re working on a project in a new sector, a new region—whatever the case may be—there may be idiosyncrasies we’re unaware of and can’t anticipate.
Uncertainty is unavoidable.
This is where adding a contingency comes into play.
What is a contingency?
A contingency—or a contingency budget—is an amount of money included within a quote to cover potential complications. The idea is to essentially compensate for uncertainty. This allows us to adapt to unplanned issues without wiping out our profitability.
How much should you budget for contingency?
How much you should budget for contingency depends on your assessment of the risk, but anywhere between 5%—20% is typical.
How to include a contingency in your quotes
The most common method is to add a percentage of the total fee as a separate line to your budget. For example, let’s say your risk assessment suggests a 10% contingency and the project has been initially quoted at £10,000. You’d add a contingency line for £1,000 (10% of £10,000) and raise the overall fee to £11,000.
This is the point where we warn you of an all-too-common pitfall.
Some people simply increase the budgeted days/hours to mask the contingency e.g. if they’ve budgeted 10 days, they increase the budget to 11 days. Seems simple, right? However, there’s one major problem with this … it usually results in those extra days/hours being consumed as part of the “normal” budget!
You want to make sure you hold that extra budget in reserve, and only use it if and when an unforeseen circumstance pops up. You don’t want to encounter an issue only to find you’ve burned through your contingency budget already.
So, be sure to add the contingency as a separate line in your budget. And if it doesn’t get used, great! You’ve just made some extra profit.
Top Tip: It’s always worth factoring contingencies (or discounts, for that matter) as a separate line. For example, just because you offer a 10% discount to a client doesn’t mean it’s going to take your team 10% less time to complete the project.
What if the client wants a full breakdown of the budget?
Unsurprisingly, we thought you’d ask about this…
This is the one occasion where we do encourage you to increase the budget of days/hours rather than add it as a separate line item. The reason for this is a “contingency” line on a client-facing quote stands out like a sore thumb and it’s the first thing they'll say “you can get rid of that” to.
Of course, we want to make sure we only allocate the hours we originally budgeted to our teams. Therefore, we need 2 budgets:
- A budget with the contingency as an additional line (for you)
- A budget with the contingency spread out as additional hours (for the client)
If you’re using CMap's Accounting, Consulting or Life Sciences edition, that’s super-easy to do:
- Create an initial budget in CMap’s “Fee Estimator” tool that is accurate in terms of the time we think we’ll need, with a single “adjustment” line entered for the contingency amount
- Save that budget using the “Snapshot” feature
- Then, update the hours—e.g. increase them by 10%—to factor the contingency into the time quoted and remove the adjustment line
- Export the full costing breakdown to include in your quote to the client.
- If the client chooses to go ahead, restore the original Snapshot so you’re back to the right number of hours to allocate to the team, with your 10% contingency separated out for a rainy day.
If you’re not a CMap user, you can simply adapt the above method to whatever tool you’re currently using to build your budgets e.g. two Excel files.
How should you use your contingency during the project?
Imagine something unforeseen has occurred and we need to dip into our contingency budget—our analyst needs an additional 8 hours to fix an error, for example.
At this point we have two choices:
- Allow our analyst to work more hours, adding them to their timesheet without adjusting the overall budget. As the project manager, you’ll know that overspend is covered by the contingency
- Update your budget to increase their time budget by 8 hours, and reduce the value of your contingency by the relevant amount
The approach you take is entirely down to you, and there are pros and cons for both. What we do recommend though is taking a “snapshot” of the original budget to refer back to during your project review. That way, if you find you’re always dipping into your contingency for the same reasons on similar projects, you’ve identified how to adjust your quote accordingly in future.
Considering risk as part of the initial quoting process and adding a contingency buffer to cover unexpected hiccups is a common trait we witness in the most profitable companies we work with. We highly encourage you to give it a try.