Contingency Reserves

Contingency is referred to an amount added to the project’s base estimate to cover for uncertainties and risks, more specifically known-unknowns. Or as AACE defines, items, conditions, or events for which the state, occurrence and/or effect is uncertain but is likely to result in additional costs. The purpose of allocating contingency to the base estimate is essentially a form of mitigation risk that accounts for such uncertainties. Contingency does not cover any major scope changes, nor escalation or extraordinary events. Management reserve (sometimes referred as management contingency) covers these unidentified risks of the project, and is not included in the estimate, meaning that the project manager or project controller is only permitted to use this reserve if the organizational management approves, unlike project contingency that is usually expended. Managing contingency is crucial for accounting for project uncertainties by offering some cushioning in the budget estimate which could also positively affect a project’s performance provide a more realistic business case.