It’s no secret that ERP projects often run over time and over budget. There are countless case studies, whitepapers, anecdotes and even lawsuits that share horror stories of unexpected costs and scope extensions. Even with the best planning and due diligence, the unforeseen occurs. The recent ERP failure at Lidl and the National Grid vs. Wipro lawsuit are testaments to this.
For this reason, CFOs inherently know the importance of an ERP contingency budget, yet most organizations do have some form of contingency built into their project budget discussions. While a good start, this is where the use of best practice stops.
Below are some key pointers to consider when establishing an ERP contingency budget:
Contingency is ONLY for unknown and unforeseen factors. What this means is if you think there “may” be a need for some customization, you need to put this into the budget as a specific line item and not rely on the contingency budget to assume this. Where contingency comes in would be for excess customization or unforeseen roadblocks. If you think you “may” want or need customized training materials, put this in the budget. As it has been noted as a specific potential need it is not to be consumed by contingency budget. Note: your contingency budget should not be used for things that should be foreseen, such as organizational change management. For more info, read our recent blog about underestimating organizational change management on your digital transformation.
Contingency does NOT cover scope expansion. If you decide to include a functional area that was not initially scoped, the overall project budget and timeline needs to be modified. This is normal during the course of an ERP implementation and should follow the governance structure to gain approval. With this, contingency needs to remain as it was and not used for this purpose.
Most contingency budgets are way too small. Depending on the scope of the project, we recommend 15-20% of the total project budget. To clarify, first determine the estimated project budget for the scope of the project, and then multiply this number by ~1.2 to get the actual budget to go forward for approval. (Read our blog on how to estimate implementation time and cost for your SAP S/4HANA, Oracle Cloud ERP, or Microsoft Dynamics 365 project).
Contingency percentages need to move with any project modifications. As noted above, these projects are moving targets. You cannot accurately set a budget before any work has been done and expect that to stick. If you are holding to 20% contingency, if you decide to add another $500,000 worth of project work to your implementation, you need to request $600,000 in order to stay true within a reasonable contingency.
Contingency budget can and should be used and reduced as needed. If you find an unexpected need that is outside of a formal scope expansion, this is where you will use contingency. If you find the contingency budget is gone only a few months into a project, reconsider how it was used and request a modification to the project budget.
Ultimately the goal is to NOT use the contingency budget. With proper planning and effective project and change management you may be able to get through your project with time and money to spare. This is not all that common, but a good target.
Contingency is not only for dollars, but timelines as well. Buffers should be set in the project timeline for unexpected mishaps, illness, vacations, weather and other things that can’t necessarily be foreseen.
The real key to successfully managing contingency budget as well as overall project budget is to have effective program management and planning. Whether you are creating a plan for an SAP S/4HANA implementation or any other digital transformation or ERP project, defining a reasonable contingency is key. Budgets that are set to early and without proper due diligence will most likely fail, with or without contingency.
