Project contingency: build a reserve without counting risk twice
Separate base uncertainty, discrete events and the pricing reserve with a worked $75,000 P80 project example.
Contingency needs a named baseline
Suppose a hypothetical model has a $60,000 base estimate, a $64,000 median cost and a $75,000 P80 cost. A reserve to P80 is $15,000 above the base or $11,000 above the median. Both differences are correct. Calling either one simply “the contingency” hides the starting point.
Document the baseline, the chosen percentile and which risks are already included. A reserve is the gap between two cost values. A profit margin is a separate pricing choice; it is not another name for contingency.
Three places uncertainty can enter
- Ordinary variation
- Task duration ranges represent work that will happen but may take longer or shorter than expected.
- Discrete events
- A risk represents something that might happen, such as a vendor interface change requiring rework.
- Commercial reserve
- The distance from your chosen baseline to a cost percentile summarizes uncertainty already present in the simulation.
If a task's pessimistic duration already includes the full vendor rework, adding the same rework as a separate risk can count it twice. Either model the task conditional on no interface change and add a discrete event, or explain what additional effect the separate event represents. Do not remove genuinely different risks merely because they share a vendor.
Expected risk cost is not a high-confidence reserve
Consider one event with a 20% probability and an exactly $10,000 cost if it occurs. Its expected added cost is $2,000: 0.20 × $10,000. No individual outcome in this simplified example costs $2,000. The event costs either zero or $10,000. Adding the expected value as a fixed allowance erases that distinction.
Percentiles are especially sensitive at jumps in a discrete distribution. Simulation and interpolation can place a reported percentile near such a boundary differently. Inspect the event and its severity rather than interpreting the last dollar of a percentile as precise knowledge.
Turn the reserve into a quote
If the model already includes the relevant risks and its P80 cost is $75,000, a 25% target margin implies $75,000 ÷ 0.75 = $100,000. Adding the $15,000 reserve to $75,000 again would use a $90,000 cost basis and quote $120,000. That extra allowance may be intentional, but it must not be described as necessary to reach the original modeled P80.
Record exclusions alongside the result. BidVariance does not automatically turn a risk delay into extra labor burn: include the associated expense in the risk cost range. Start with the cost-overrun calculator, then use the project setup guide to model tasks and discrete events separately.