Nothing ever goes completely according to plan, so no matter the size or scope of your project, having some type of informal or formal contingency fund/plan in place is going to be a necessity (and will help protect your relationship with the client). At one company I worked for, we had some advantages when it came to contingency planning: namely, the majority of our projects were similar in nature, typically revolving around infratstructure improvements or application deployments. The key variation among these projects was usually restricted to the starting point, that is, their existing technical situation.
Our projects were usually phased, so phase I would be the work to standardize and stabilize what they had; to implement best-practices and remove disparities. Once we had them at a level we were comfortable with, subsequent phases had very little cost variance, because we were building on a solid foundation that we put in place. This allowed us to show senior managers and key stakeholders that a contingency was necessary for the first phase, as we were transitioning from how they currently operated to how we were going to work together, but which could be drastically reduced once the situation was under our control. This was intuitive for them, as everyone expected some bumps in the beginning, so we experienced very little resistance.
We also benefited from our estimating process. We firmly believed in expectations management as a key to customer satisfaction. From the very beginning of a project, when we were in the evaluation and selection phases, our estimates consisted of value ranges based on best-, expected- and worst-case scenarios. This approach accounted for the inherent uncertainty in a project, but still gave the client detailed enough information to make a decision. Using ranges also gave the client options as the project progressed, allowing for some items to be added, changed, or removed without affecting the overall budget range. While this approach didn’t utilize a contingency fund per se', the concept still recognized the uncertainty of the future and allowed for changes to project cost without forcing the project to go over-budget. Because this approach forced the customer to see that we expect some variation, and gave them control over minor changes to scope with regards to cost, they were usually willing to allow for the range, which acted as an informal contingency fund.
Sometimes, however, something more formal was required. As mentioned above, many of our projects were similar in nature. However, sometimes we would come up against larger or more complex projects that fell outside of our detailed experience, and required a greater allowance for uncertainty. Again, we would present estimate ranges, but we would also plan on a formal contingency. To overcome resistance, we conducted a thorough analysis of what they were asking for, and would detail our primary concerns, as related to uncertainty, to the client to make them understand why we were putting $X.00 aside as a contingency. We also made it understood that as the project progressed, if these contingencies came to fruition, we would discuss how to proceed with them before applying the funds. This way they maintained some element of control, and were more comfortable with the process.
When everything was said and done, the mix of formal and informal contingency planning we utilized, based on strong communication and expectations management, helped us maintain client satisfaction and our own profitability.
