- Shawn Stamp
- Reading Time: 3 minutes
After more than three decades of ERP transformation “lessons learned,” few topics continue to generate more debate, or amplify risk, than budget contingency. How much is enough? Who decides? And why do so many ERP programs still run over-budget despite best intentions?
Understanding the factors that you need to consider when establishing your ERP budget contingency is the key to securing the flexibility you need to sustain project momentum while also keeping you out of the boardroom.
Here we will cover what ERP budget contingency is, why it matters, and how to recognize the warning signs that your ERP program may be at risk of becoming another statistic.
What Is ERP Budget Contingency and Why Does It Matter?
Even the best-planned transformation programs need to expect and plan for the unknown: integration surprises, vendor delays, last-minute scope changes, or organizational pushback. In fact, studies have shown that roughly 65% of large IT-enabled projects go over budget, and there is evidence to support that 25% of these projects will end up going 50% over plan.
The message should be clear: without adequate contingency built into your budget, you increase the risk that your ERP program will fall prey to cost overruns, missed deadlines, and a loss of executive trust. Nevertheless, many Program Management Offices (PMO) continue to under-budget this critical component—often driven by optimism or pressure to present lean, clean financials.
But when this kind of thinking is not balanced against a program’s risk profile, it inevitably leads to one of the most damaging, and avoidable, forms of project risk: denial.
How Much ERP Contingency Budget Is Enough?
There’s no universal formula, and the amount of contingency budget you allocate will depend on the complexity of your implementation. Low-complexity implementations with tight alignment across stakeholders may require less budget to account for risk because the risk profile is low. But if your ERP program involves global rollouts, significant legacy integration, major change management, or concurrent business transformation, not only does the risk profile increase sharply, but the buffer required to manage it needs to scale up.
Still, many PMOs are prone to underestimate the amount of contingency required because they narrowly perceive it as a necessary evil for covering “extra” work. But contingency isn’t just about managing scope; it’s about protecting the program from the inevitable friction that comes with complexity, people, and change.
Real-World Examples of Inadequate Contingency
In our recent white paper, our expert executive shares a story about a global enterprise that allocated just 5% contingency, assuming experience and vendor discipline would close the gap. Yet within six months, they were $10M over budget, largely due to underestimated integration and testing efforts.
Unfortunately, this experience is more common than you might think. ERP programs in government, healthcare, and manufacturing have all made headlines for blowing past budgets due in part to poor contingency planning. And in each case, there’s a common thread: the team either ignored the potential risks or chose to believe everything would go as planned.
Why ERP Programs Underspend on Contingency
So why does this keep happening? There are a number of reasons why PMOs continue to miss the mark when setting their program contingency, including:
- Executive pressure to keep budget estimates lean
- Optimism bias during planning and vendor negotiations
- Overconfidence in agile methods or vendor capabilities
- Lack of benchmarks or real-world delivery experience
In reality, though, these are really symptoms of a larger problem that often gets downplayed or ignored – ERP transformations are not like other IT projects. Everything is more complex, the cost of failure is exponentially greater, and institutional “common knowledge” often isn’t relevant.
These differences cannot be underestimated, and ignoring or denying them is virtually guaranteed to put your program in the danger zone before it even gets started. Fortunately, getting some unbiased, independent advice during the road-mapping stage of your program can help avoid catastrophes and difficult decisions later on.
Strategies for Dealing with Contingency Shortfalls
On the other hand, if you’re already in trouble, or heading there fast, there are ways to mitigate the impact on your budget and recover:
- Re-baseline the scope to focus on high-value, time-sensitive functionality
- Tighten governance around financial decisions and scope changes
- Bring in reinforcements like our Project Execution Advisory team, who has supported clients through ERP turnarounds with real-time diagnostics, risk triage, and delivery acceleration
Granted, these tactics are less-than-ideal solutions to a problem that could have potentially been avoided, but it’s better to take drastic measures and stabilize the project before your program becomes the next headline.
Contingency Is Strategy, Not Spare Change
ERP transformations are high-stakes and high-complexity by nature. But complexity itself doesn’t delay programs. Assuming that ERP programs are “business as usual” is what derails programs. It’s important to remember that setting aside a sufficient buffer to prepare for the inevitable delay isn’t a sign of poor planning, but rather a sign of mature, realistic leadership.
