How much contingency should a project carry to adequately cover project risks?
The answer is it depends. The amount of risk present in a project varies according
to a number of factors, but primarily it's a result of uncertainty, which is driven
by the level of project definition.
Other considerations to be taken into account while evaluating the appropriate level
of contingency necessary are the complexity of the project and how much experience
does the company have with the project at hand.
For example, if a given company is tendering for the construction of a road for a
particular client, say the Texas Department of Transportation (DOT), for which this
company in question has a long term relationship with dozens of successfully completed
projects, all or most completed on time and on budget with few setbacks, then the
company can quite comfortably tender with a high level of confidence and therefore
a low percentage of contingency versus total project price.
On the other hand, if this same company is now for the first time considering tendering
for a road project for a new client, say the California DOT, and the project is substantially
more complex involving a number of flyovers and bridges which the company has no
previous experience with, then contingency should be much higher to account for the
The contingency guidelines adopted by the Department of Energy (DOE) are as follows: