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Unformatted text preview: productivity. They can argue that, since the contingency budgets are based on probabilities, it is a random thing and not something that could have been foreseen during the development of the project plan. Consequently, the argument is that contingency budget transfers should be counted as change orders and the additional work should not be considered as additional but rather an ''intrinsic" part of the original budget. Moreover, if the contingency budget transfers are handled as change orders, they can still be labeled as contingency transfers. This way the original budget is still recorded, and the amount of contingency applied can be determined at a later date. This line of reasoning does not, however, tend to categorize the contingency budget transfers by variance type. As a general rule of thumb, it is better, when using the balance transfer method, to make the transfers via the variance tracking system and to categorize contingency budget transfers in the same way that any other variances are categorized. This way, there is a uniform policy for using the variance tracking system, and the contingency budget ends up being merely a convenient way to pay for all or some portion of the variances. The other commonly used method for contingency draw- down, the contingency pool method, leaves the contingency budget in the contingency package. All overruns on work packages associated with the control package to which the contingency is allocated are charged to the contingency package, Page 239 rather than to the work packages. In a sense, this makes these overruns appear not to have occurred on the project but rather to be strictly a contingency phenomenon. This eliminates variance tracking of contingency budget transfers. When this method of contingency draw-down is employed, a modification to where the contingency packages fit into the WBS is often in order. Since overruns covered by contingency are considered to be a contingency phenomenon, it is better to have all the contingency packages roll up to a total contingency package at the total project level. Therefore, it is better if there is a separate "leg" of the WBS hierarchy that contains all the contingency packages and at the same time mirrors the part of the WBS that consists of the control packages that have contingency associated with them. Finally, there are issues that arise from unused contingency budgets that we will only touch on. If, during the life of the project, it appears that contingency is not being drawn down nearly as rapidly as progress is being achieved, the question naturally arises if some contingency can be released. This is really not a project management question so much as a financial question. On large projects, contingency budgets can be significant, and the contingency resources that are not being utilized may be better used on another project or on other business objectives. The question for project management is how to recognize whether surplus contingency exists and whether it is safe to release some or all of...
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This note was uploaded on 01/11/2011 for the course ACC 9 taught by Professor Yeetan during the Spring '10 term at Sunway University College.
- Spring '10