Monday, February 25, 2013

Project Management - Be Bold and drop the contingency

I have spent today reviewing a portfolio of projects and was concerned to see that so many of them were bloated with contingent costs. I reminded my clients that such practices can sink a business. Because project work is risky in many cases, especially in my field of healthcare I T, a certain amount of time is added to the estimates to cover unknown events. Typically this is set at around 15% of the effort required.

The use of contingency is a prudent way to mitigate risk but it depends how and where you apply it. My preference is to add contingency over a program of work, containing many projects, rather than at a project or sub project level. However what often happens, and this can kill your business, is that at every line of the project plan people are building in contingent costs.

An example will illustrate the impact of this practice at the sub project, project and program level.

Let's take a 10 step project, which is one of ten similar projects comprising a program.

Costing contingency at step level where each step takes 10 days = 1.5 days contingency per step = 15 days contingency. Then apply 15% overall contingency = 15 days gives a total contingency of 30 days which actually equals 30% of the project days.

Costing contingency at a project level for a 100 day project = 15 days

Costing contingency at a program level for 10 projects of 100 days each using a conservative estimate that 50% of the projects will need to use the contingency and you get = 1000*15%*50%= 75 days. When this is cut back to project level this equals a contingency of 7.5 days.

When putting in a bid for business the difference between a 30 day contingency and a 7.5 day one is material. Say you cost time at $1000 per day then the quotes for the same work will differ by $22,500. This will often be the difference between getting a piece of work or losing it.

I advise my clients who are costing up projects to press staff to give estimates without contingency. Many people are cautious and will say 3 days rather than 2 days for some work, just in case. Reassure such staff that a contingency will be added but that you want a realistic estimation from them, the contingent liability is not their problem, but yours.

You may want to revisit some of your projects to look for unnecessary contingency. Your business may depend upon it.

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