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MANAGING COST CONTINGENCY 191

• We have a negotiated and accepted change in the project completion date
(chg. 2 & 3).

• We have a valid basis for calculating schedule and cost variances for EVA (if
employed).

In the example, above, three of the changes involved increased costs to the
project, which were not funded by the client. Where did the money come from?
It came from the Management Reserve.

Note that the spreadsheet only shows changes to the project budget due to ap-
proved changes (both funded and unfunded). It shows that there is now an ap-
proved project budget of $110,000. The spreadsheet does not display any of the
actual project expenditures.

But when we get down to analyzing the project cost performance, we will have
a revised (and proper) budget figure to compare to the actual costs.

Imagine if we did not have such a change control system. What do we use as
the project BAC (Budget at Completion)? Is it $100,000 or $115,000? Which is
fairer? To answer this, we continue to look at this example, assuming that the
project gets completed at an actual cost of $108,000.

If we use the lower budget figure ($100,000), and the project comes in at
$108,000, then we are apt to report that the project had overrun the budget. Yet
$10,000 of work had been added to the project. Would it be fair to penalize the
project team for the overrun, when it really wasn’t such?

If we use the higher budget figure, which includes the Management Reserve
($115,000), then we give the team credit for cost performance that was not due to
actual project performance but rather to unused contingency.

With our change control log and management system, we know just what
the actual cost performance was. The project team spent $108,000 to do
$110,000 of work. A valid basis for performance measurements was retained.
It can be fairly reported that the team brought the project in under budget—
by $2,000.

Managing Cost Contingency

The same concluding comments that I wrote for schedule contingency would ap-
ply to cost contingency.

It would be wasteful to build in a cost contingency and then assume that the
extra funding is up for grabs. Cost contingency should be reserved for scope
changes to the plan, rather than to account for poor performance. It is a reserve
for unforeseen extras, which are not funded by the client.