Contingency

What is a Contingency?

A contingency is an unanticipated future event that may adversely affect an organization or individual. It is a condition or possible future event that occurs by chance, whether intentional or not. For example, economic recession, natural disaster, or pandemic are all contingencies.

Moreover, its occurrence and resulting impact are so crucial that unique or unconventional measures must be taken to anticipate or deal with it. In business and project management, an emergency is described as a guarantee provided to a commercial or non-commercial entity in the event of an unforeseen or uncertain event.

Therefore, when such unpredictable contingencies occur, the resulting cost becomes a contingent event.

In 2019, many companies were hit by the coronavirus pandemic, which forced many employees to create a new work model and work remotely. Accordingly, companies are beginning to implement remote work strategies.

However, for some businesses, remote working is not an implementable option, which has led to the implementation of enhanced security measures for employees and customers to prevent the spread of the virus.

While it is possible to prepare for contingencies, it is difficult to anticipate the nature and scope of such adverse events. Companies and investors can plan for various contingencies by analyzing and implementing protective measures.

How does Contingency work?

Planning for emergencies is vital whether or not we know the nature or scope of the troubles. An analysis of future projections is needed to gauge the spirit and scope of possible emergencies. 

This analysis should include possible remedial or protective measures to avoid or mitigate the adverse effects of an emergency.

There are three main ways to minimize the effect of contingencies:

1. Credit lines
2. Insurance
3. Capital raising and revenue retention

In an organization, this analysis is referred to as an emergency plan. Its sole purpose is to provide a safety net or insurance that allows an organization to minimize as much harm as possible from potential negative impacts. 

This emergency plan is often referred to as a business continuity plan.

Finance managers also often recommend setting aside a large cash reserve so the company has strong liquidity to respond to unexpected events, even during poor sales or unexpected expenses. 

When the company's financial position is strong, managers may seek to proactively open lines of credit to ensure that borrowing is available in all circumstances. Emergency plans typically include insurance policies that cover losses that may arise during and after an adverse event.

However, insurance policies may not cover all expenses or every situation. Insurance companies may also limit coverage or exclude natural disasters, which are unavoidable events that mean they are beyond human control, such as floods and earthquakes. 

In addition, insurance cannot address issues such as losing customers to competitors due to an event and internal company conflicts, such as information theft.

Therefore, companies need to recruit professionals to develop emergency plans that will help them minimize lost revenue and increased costs in the event of a disruption to business operations.

Contingency planning

Such a plan can be viewed as 'plan B.' It is an action plan designed to help an organization effectively respond to major events, incidents, or situations that may or may not occur.

An emergency risk plan is a blueprint or backup plan developed by management to assist the organization in responding to unforeseen adverse events. 

It is used to protect the company's reputation and finances and to mitigate damage caused by unforeseen circumstances.

Other business readiness plans developed as standards worldwide have been linked to the emergency planning process for a long time. 

These standards address business continuity, incident response, cybersecurity, business continuity, critical infrastructure, crisis communications, emergency response, natural disaster response, and organizational resilience.

Emergency risk planning can focus on a specific part of an organization's operations. For example, it could be the action you need to take to back up all your critical data. Another example is the rules on how to provide employees with remote work when equipment doesn't work.

The primary goal of an emergency risk plan is to ensure the continuity of a company's business during and after a catastrophic event. 

Thus, the plan helps the organization recover smoothly from negative impacts after a significant risk threatening its survival. It should also be able to thwart any negative publicity that may arise as a result.

Contingency Management

Contingencies can create risk in numerous areas, such as real estate transactions, commodities, investments, currency exchange rates, and geopolitics. 

As a result, companies, governments, and investors are using emergency plans to address the risk of unexpected events. Let's take a look at common Contingency Management types:

1. Protecting Assets

A contingent asset is also a part of an emergency that represents a benefit accruing to a company or individual after resolving some uncertain future event. A favorable judgment in a lawsuit or an inheritance is an example of a contingent asset.

The purchase of insurance is one type of contingent asset plan. Insurance can pay cash or benefits upon a particular contingent event. For example, property insurance may be purchased to protect against fire or wind damage.

2. Investing Positions

They use hedging policies such as stop-loss orders, which allow them to launch positions at specific prices. The other is to use an options strategy that will make money for the investor when their finances are affected by an adverse event and they lose money.

The option strategy has a cost. This strategy requires the investor to pay cash in advance as a premium. When the option strategy takes effect, the money earned can fully or partially cover the investor's losses.

A good investor will adopt a diversified investment strategy, which means buying different investments. Asset diversification can effectively reduce risk if an asset class declines in value.

3. Business Continuity and Recovery

A business continuity plan (BCP) or business recovery plan is one type of emergency plan. Often companies need to plan for natural disasters, which is used to ensure that the company can continue operations before and after an unexpected event.

This plan ensures that the company's critical operations will function during a particular period and analyzes the impact that an event may have on the company's operations. This plan includes specific measures to restore critical business functions.

4. Cybersecurity

Cybercrime often occurs when a company is in crisis. Criminals try to break into a company's systems, steal, and destroy data to affect the normal functioning of the business. Emergency risk plans require cyber security teams to protect the company's systems from hackers and threats.

Steps in Creating a Contingency Plan

An effective emergency plan must be well-researched and reinforced by the cooperation of employees and stakeholders. In line with current national and international standards, the following activities are also recommended in the development of an emergency response plan:

1. State contingency policy

This policy is used to authorize and guide the development of the plan. It can communicate guidelines that should be followed during a disaster. 

This statement should be familiar to employees throughout the company to improve the quality of response.

2. Business impact analysis (BIA)

The BIA identifies and prioritizes systems critical to an organization's business functions.

• Identify resources
  A list of resources that can reduce the impact of a disaster or adverse event should be made in advance, including resources that the company already has and can obtain.
• Identify key risks
  A critical step in developing the plan is identifying the significant risks that could affect the company's operations; a process requires collaboration involving department heads and external consultants. BIA helps assess the probability of an event occurring and the magnitude of its impact on the company and helps predict future risks and priorities.
• Prioritize risk impact
  After all potential risks have been identified, the company prioritizes them according to the severity of their possible impact and the probability of their occurrence.

3. Preventive controls

To ensure system availability, companies should proactively take measures to prevent system outages and disruptions, which can also reduce the expenses associated with taking emergency measures and maintaining the system life cycle.

4. Contingency strategies

A thorough recovery policy ensures that the system can recover quickly and completely after an outage.

5. Drafting a contingency plan

This is a detailed action plan. This detailed plan contains guidance and procedures on handling damaged or unavailable systems based on the level of impact of the risk and the requirements for system recovery.

This plan requires different plans for different levels of risk. Therefore, prioritization of risks is critical. The emergency plan provides multiple scenarios considering a broader range of risks and situations.

This plan needs to minimize losses. The program should detail the actions to be taken before and after the event, as well as the responsibilities and action planning for each employee, and ensure that the company can return to normal operations as soon as possible.

During the planning phase, the company should establish an emergency fund reserve to safeguard against unforeseen events to absorb potential losses.

Another critical measure is to purchase insurance. When a loss occurs, insurance will provide some compensation. The costs incurred by an insurance policy need to be adequately budgeted for in the plan.

6. Share the plan

Such plans should be made known to all relevant personnel to ensure that all personnel can respond optimally and promptly when the project is triggered.

7. Test the plan

Testing the effectiveness and resilience of the plan is an essential step in emergency planning. Through multiple simulations, the time required for response and execution is recorded to understand the program's gaps and prepare the personnel involved before an event occurs.

At the same time, testing can identify and correct gaps in the plan, which helps improve the program's effectiveness and the organization's readiness.

8. Plan maintenance

Technology and the environment change as time passes, and the plan's effectiveness decreases. Therefore, the company needs to modify and maintain the project promptly according to the situation.

Contingency risk

Risk emergency means a provision specified in a contract and established as part of the maximum allowable construction cost to cover unforeseen costs for work items not included or not addressed in the total permissible construction cost.

A risk emergency plan provides an organization with a detailed approach to guiding risks as they occur; it is designed to reduce the risk of harm to company assets and provide order when events become complex and require urgent action. This plan can be used to address both external and internal threats.

Risk emergency plans consider most events to unfold in phases. Therefore, the program will change at different scenario stages. The instructions all address the same issue but in different risk contexts.

Risk emergency plans do not affect the likelihood of a hazard becoming an actual problem. However, if a hazard emergency plan includes measures to be taken when there are warning signs, the probability that an organization will suffer widespread harm decreases.

A risk emergency plan does not need to cost an organization a significant amount of money unless an event requires the use of emergency resources. 

For example, a shipping company will not experience the cost of using a longer alternate route until some event forces the company to abandon its usual way.

Contingencies in project management

A contingency plan in project management is a defined and actionable plan implemented when identified risks become a reality. It is executed when things go differently than expected. 

The Project Management Institute considers an emergency plan to be: "a plan that provides defined actions to be taken in the event of a specified risk event." Emergency planning in project management is an integral part of risk management and should be part of the risk management plan.

In project management, contingencies are usually costs and funds set aside to deal with unforeseen events. 

However, they also refer to other aspects of the project, such as resource shortages and meeting deadlines. Risk emergency plans should be prepared for all the risks mentioned in the previous sections.

In order not to have the opposite effect, it is best for the project manager not to disclose the existence of an emergency reserve to other project team members. The emergency reserve will be viewed as authorization to exceed the budget allocation.

Project emergency is usually expressed as a percentage. The initial phase of a project is usually the riskiest, using a higher rate of emergencies.

However, as the project progresses, the unknowns diminish, and the project's direction becomes apparent; the emergency percentage will gradually decrease.

Researched and authored by Zezhao Fang | LinkedIn

Reviewed and Edited by Aditya Salunke I LinkedIn

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