Projects and Profits 38 Calculating Project Contingencies to Avoid ... Calculating Project Contingencies to Avoid Software Project Failures This article posits that project contingencies should be based on the amount it will take to recover from the underestimation and not on the amount that would have been required had the project been adequately planned right from the beginning. The model proposed takes into account not only the magnitude but also the time at which the underestimation is acknowledged. SPECIAL ISSUE Eduardo Miranda and Alain Abran © 2007 Eduardo Miranda and Alain Abran. All Rights Reserved. There seems to be a general misunderstanding to the effect that a mathematical model cannot be undertaken until every constant and functional relationship is known to high accuracy. This often leads to the omission of admittedly highly significant factors (most of the ‘intangible’ influences on decisions) because these are unmeasured or unmeasurable. To omit such variables is equivalent to saying that they have zero effect. Probably the only value known to be wrong. – Jay Forester, 1961 Introduction It is not the same:  To start a 12 months project or to start a six months’ one and later extend it by another six months.  To start a small product or cut into half a large product during the middle of the project to meet the deadlines.  To start a project with the right amount of people or to add resources anytime later. The effort to recover from the underestimation would depend at least on two parameters:  The magnitude of the underestimation; and  The time at which the recovery action is initiated. Mathematically this could be described as: <1>     , Contingency RecoveryCost u t p t p u dtdu   Equation <1> above states that contingency funds must equal what it would cost to recover from an underestimation of magnitude “u” acknowledged at a time “t” by the probability of “u” and the probability of “t”, that is the probability of experiencing an underestimation of magnitude “u” and the probability of acting on it in month “t” relative to the start of the project. By including in the project cost any expected recovery efforts, the following benefits could be realized [1]: