A contingency budget is money that is set aside in a budget for unexpected costs. It is common for unexpected costs to be expected. As such, a contingency budget avoids the complexity of revising a budget with each unexpected cost and resubmitting it for approval. The following are common methods for calculating a contingency budget.
Standard AmountInclusion of a standard amount such as 10% of the budget based on the common practices of a firm or industry. By definition, contingency costs are unknown. As such, some firms see no point in estimating them with complex algorithms.
Management Comfort LevelInclusion of an amount that is approved by management. Generally speaking, contingency budget isn't popular with management and it can be hard to sell.
Identifying risks and quantifying their impact and probability is a reasonably accurate way to estimate contingency cost.Looking at projects in your industry and how many go over budget. If projects commonly go over budget by 40% for similar projects, a contingency of 5% may be far too small.
ParametersStandard calculations for an industry or firm based on parameters that provide a reasonable approximation of estimation errors and risk.
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