Isn’t it odd that over half the projects in this world have the exact same contingency budget? As if the risks attached to every project were about the same.
It seems like almost any industry has a little magic wand. That one thing that helps against almost all possible problems, regardless of the size of the problem. No matter what is going on at the time, just apply the magic wand, and the problem will disappear as fast as an unlocked bike in Amsterdam.
Remember when you were little? Your mother also had that magic wand. Whenever you fell and hurt yourself, all you really required was a little kiss from her on that spot, and the pain, no matter how strong, would magically disappear.
The same applies to grown-ups. If you have ever watched football (”soccer” for the Americans among you), you will have witnessed their version of the magic wand. The water sponge. Players can be rolling on the floor, crying out as if breathing out their last bits of air, but as soon as the team doctor applies the water-soaked sponge.... it’s game on!
Projects are no exception. These also have a magic wand, that one thing that takes care of every possible eventuality. Sometimes it is called the contingency budget and sometimes the applied tolerance, depending on the company’s approach and naming conventions.
And. It. Is. Always. Ten. Percent.
That’s the magical part!
What the Number is Supposed to Depend on
Usually, your margin of error during planning depends on a lot of things. Familiarity with the subject matter. Quality of the tools you are working with. Price stability of the supplies you need. Whether the team has done this before, or anything like it. Whether the technology has ever been put into production anywhere. And then some…
But no matter how risky your project, no matter how uncertain the circumstances, no matter how untrained the resources, no matter how unknown the applied technology and no matter how unreliable the supplier..... 10% should cover it!
Ten Percent of the Wrong Thing
Here is the part that is worth sitting with for a minute, because it is arithmetic rather than opinion.
Ten percent is a percentage of the budget. So the contingency is calculated from the cost of the project, which means it is a function of how big the project is, and not a function of what might go wrong.
Those are two completely different questions, and only one of them has anything to do with risk.
Take two projects with the same budget. One is the fourth release of a system the team has maintained for six years, with a supplier they know, on technology that is boring in the best sense of the word. The other is a first implementation, new vendor, new platform, a data migration nobody has scoped properly, and a go-live date driven by a regulatory deadline.
Same budget. Same ten percent. One of those numbers is far too generous, and the other is a rounding error against what is coming.
And notice which way the arithmetic runs. Because contingency is a percentage of cost, the cheapest projects get the least of it. Yet a small project with an unfamiliar supplier and a technology nobody in the building has used before can quite easily be the riskiest thing in the entire portfolio. The formula gives it the smallest cushion precisely because it is small.
Why Nobody Argues with it
There is a reason this survives, and it is not that anybody believes in it.
Ten percent is unarguable. It requires no explanation, no analysis, and no uncomfortable conversation. Nobody in a Steering Committee has ever been asked to justify ten percent.
Any other number has to be defended. Seventeen percent means somebody has to stand up and explain what the extra seven is for, name the risks behind it, and accept that they will be asked about it again every month until the project closes.
So the round number wins. Not because it is right, but because it is the only one that never has to be explained.
The alternative is not complicated, and it does not require a model. Take the risks that have actually been identified, price what each one costs if it happens, weight it by how likely it is, and add the results together. That is your contingency. Some projects will land at three percent. Some will land at twenty-five, and the conversation about whether to proceed at twenty-five is the single most useful conversation anybody will have about that project all year.
Why always ten percent? We really do not know, and neither does anybody we have asked about this mythical number. Maybe somewhere in the past, somebody decided that for one specific project ten percent was a reasonable margin of error. Or perhaps it was never one project at all, but a company-wide standard written by somebody who has long since retired.
And did it start with one company and spread across the entire project world? Or did all companies independently arrive at the same conclusion at about the same time, the conclusion that ten percent covers all?
As with all things magical, we will never really know…