PROJECT BUDGETING

Project Contingencies
 Budget contingencies acknowledge that project cost
estimates are only approximations.
 Full knowledge of events is impossible.
 Contingency budgets, that allocates an extra amount
to cover the unpredictable.
 The allocation of contingency funding varies based
on the level of uncertainty associated with the
project. Higher the degree of uncertainty associated
with the project, the greater the amount of
contingency allotted.
 The primary goal of including contingency funds is
to prevent delays in project completion.
 Project Contingencies
Contingency funds (CF) can also address errors in
estimation, minor design changes, and other
omissions.
CF increase the chance of work being done within
the stipulated amount, which in turn increases
confidence in project success.
Confidence in project success rises when the
contingency amount is perceived as realistic and
achievable.
A well-perceived contingency amount serves as an
effective control tool for project management.
Allocation of contingency funds to various budgets
• Contingency funds can be added to individual
project activities, work packages, or the project as a
whole.
• Some organizations follow a formal allocation
process for contingency funds, incorporating a
structured buildup (Organized breakdown of the various
components that contribute over all project cost) within the
project budget.
• Task budgets are established at a reasonable level
based on the defined work, as assessed by the
estimator and the task manager.
• The set budget for individual tasks is then issued to
the personnel responsible for executing the task.
Allocation of Contingency funding
Advantages of Contingency Fundings (CF)

1. Risk Mitigation: CF provides a buffer for

unforeseen risks and uncertainties that may
arise during the project lifecycle. It acts as a
safety net, allowing the project team to address
unexpected challenges without disrupting
project timeline or quality.
2. Flexibility and Adaptability: CF offer
flexibility in resource allocation. Project
managers can use these funds to adapt to
changes, grab opportunities, or implement
improvements without the need for additional
approvals.
Advantages of Contingency Fundings (CF)
3. Stakeholder Confidence: Including CF in the
budget demonstrates a realistic and responsible
approach to project management. Stakeholders,
including sponsors and investors, may have
increased confidence in the project's ability to
overcome challenges and uncertainties.
4. Improved Decision-Making: CF empower
project managers to make decisions based on
long-term project success rather than short-term
budget constraints. It encourages proactive
problem-solving and strategic decision-making.
Drawbacks of Contingency Funding
1. Contingency funding is a source of disagreement in
project organizations. Project teams view
contingency funding positively for effective cost
control. However, project stakeholders, especially
senior management and clients, often resist accepting
it. Clients may perceive contingency funds as extra
expenses due to poor budget control and
mismanagement.
2. Some clients question the arbitrary methods used to
calculate contingency funds, such as applying a fixed
percentage before architectural design in the building
industry.
3. Contingency funds are often held in escrow to address
unforeseen difficulties during construction.
Drawbacks of Contingency Funding

4. Disagreements also arise over where to apply

contingency, whether across all project work
packages or selectively for critical activities.
5. There's a concern that team members receiving
additional contingency funding have an advantage
over those with no monetary buffer.
6. A drawback of contingency budgeting is its
vulnerability to senior management opinions about
the estimate being too high. In a budget-tweaking
environment, contingencies may be viewed as a
luxury provision and eliminated to meet an
'acceptable' budget level.
Drawbacks of Contingency Funding

7. The vulnerability issue can be resolved through

authentic communication between project
stakeholders and planners to determine reasonable
contingency levels and identify uncertain or risky
activities requiring contingency funding. It's crucial
for top management to collaborate with the project
team in supporting appropriate levels of contingency
funding.
 ISSUES IN BUDGET DEVELOPMENT
1. The project team not only has to determine which categories
of costs are relevant and appropriate for the project, but also
has to identify the principle cost driver (labor, material, etc.)
for each project activity, so that a reasonable expense can be
charged against that activity.
In allocating these resources to the project activity, the project
team has to ensure that the task is completed within the time
allocated to it by the project schedule.
2. The project team has to decide on the amount of contingency
funds to hold in reserve, which is shown as a separate line
item in the project budget. The issue of contingency is
problematic, as there is usually a fine line between appropriate
safety and too much or too little caution. The key lies in
finding a reasonable middle ground: one that neither
overstates nor underestimates the need to build in some
measure of contingency.
 Issues in Budget Development
3. If the project falls behind schedule, the project team has to
make a decision regarding accelerating (crashing) project
activities, which can have serious implications for the project
budget
4. Consequences on Overall Project Cost: Exploring the
impact of project acceleration on the overall project cost.
Discussing the challenges and considerations in budgeting
when facing schedule delays.
5. Fine Line in Contingency Management:
Acknowledging the delicate balance required in managing
contingency.
Striking a balance between appropriate caution and avoiding
excessive or insufficient contingency measures.
 Issues in Budget Development
6. Complexity and Time-Consuming Nature:
Highlighting the intricate and time-consuming nature of
developing a project budget.
Emphasizing the need for addressing multiple issues
simultaneously.
7. Focus on Three Key Points:
Stressing the importance of maintaining focus on cost
categories, resource allocation, and contingency management
for effective budget development.
8. Task Completion within Schedule:
Ensuring that resources are allocated in a manner that allows
tasks to be completed within the time allocated by the project
schedule.
To sum up….
 Along with project cost estimation, project budgeting provides
the basis for establishing sound project control and
profitability.
 To create an accurate budget for a project, we need to
understand the difference between top-down and bottom-up
budgeting, including their advantages and disadvantages.
 Finally, the budget baseline must work in relation to the project
schedule. This necessitates the creation of a time-phased
budget that recognizes the sequencing of project activities and
allows the project team to identify their budget, including
assessing its status on an ongoing basis.
 When properly managed, the budget, along with the schedule,
offers the project team the opportunity to apply maximum
control over the project.