Project contingency: build a reserve without counting risk twice

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. How wide the underlying ranges should be at your stage of the project is the subject of the cone of uncertainty.