One of the most critical components of a grant proposal is the budget. However, many grant seekers often overlook or misunderstand the importance of including contingency funding in their budget.  Contingency funding refers to a reserved amount of money set aside in a project budget to cover any unforeseen circumstances or events that were not accounted for during the project planning phase. It is essentially a financial safety net to mitigate the potential impacts of uncertainties that may arise throughout the project lifecycle.

There is often a misconception between risk and uncertainty and which of the two contingency funds/plans are made for when it comes to budgeting in grant proposals. While both terms are related to potential problems or challenges, they have distinct meanings. This blog post aims to clarify the distinction between uncertainty and risk and provide guidance on how to effectively prepare a contingency fund for uncertainties in grant-funded projects.

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Understanding Uncertainty vs. Risk:

Risk: refers to a specific, identifiable, and measurable threat or hazard that can be mitigated or managed. For example, a risk might be a potential delay in a project timeline due to a specific known event or circumstance, such as a key staff member leaving the project.  

Risks can be assessed based on their likelihood of occurrence and potential measurable impact. In a research project, for instance, risks may include equipment failure, staff turnover, or changes in regulatory requirements.

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Uncertainty: On the other hand, uncertainty refers to an unknown or unpredictable event or circumstance that cannot be easily mitigated or managed, such as an unexpected natural disaster like a thunderstorm disrupting fieldwork. Uncertainties are situations or factors that are difficult to predict or quantify, making them harder to plan for. 

The likelihood of uncertainty happening is slim and the impacts are unfathomable. For example, uncertainties in a borehole construction project may include the discovery of crude oil during the construction. Difficult to envisage that happening, right?

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The Importance of Distinguishing Uncertainty from Risk

Understanding the difference between uncertainty and risk is crucial for the following reasons. 

• Risks can be managed through specific mitigation strategies because they are foreseen and thinkable problems, but uncertainties require a more flexible and adaptable approach. 

• Risk mitigation is not the same as what to do when unforeseen circumstances occur. Failing to distinguish between the two can lead to inappropriate risk management strategies or an inadequate allocation of resources to address uncertainties. 

• Only one of the two can be included in the budget narrative under contingency. Uncertainties are what contingency funds in the budget are meant for, not risk. Not knowing which one it is can expose the organization’s vulnerability to failure.

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Types of Uncertainties

Here are some common types of uncertainties:

• Environmental uncertainties: Factors related to the external environment, such as natural disasters. An organization working in Bayelsa State in 2023 will most likely face the uncertainty of a natural disaster like flooding as witnessed in 2023. Most of the state was covered in water. 

• Technological uncertainties: These are uncertainties associated with the development or implementation of new technologies or processes. It could be the emergence of a new technology. Few predicted a time would come when AI would take over the world, but AI is indeed taking over the world. For example, organizations are using AI across tasks such as writing content, writing code and analyzing data.

• Human uncertainties: Human reactions are also unpredictable and all projects involve humans either as the team or beneficiary. This does not occur in isolation, there is usually a trigger. A project expecting participation from 1,000 women may face a setback if only 300 or fewer eventually participate. The reason for their nonparticipation can be above them too, such as sickness, death or migration.

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How to Manage Uncertainties 

• Include Contingency in Budget: This is where contingency funding plays a crucial role. Use a flexible approach to develop your project and allocate a prudent amount as contingency funds to accommodate unforeseen expenses or pivotal scope adjustments seamlessly. The amount of contingency funding required for a grant project depends on some factors. While there is no universal formula, best practices suggest allocating between 5% and 10% of the total project budget as a contingency fund. 

• Have a Contingency Plan: Aside from having an amount budgeted for contingency, have a plan on how to eventually spend the money if the inevitable finally happens. It is one thing to have the resources, it is another to know how or what to use it for. Develop a robust contingency plan that can address a wide range of potential uncertainties. This may mean you have to play the devil's advocate to develop a strong contingency plan. For example, any project in Nigeria should consider political or economic instability and how it may affect the project. 

• Continuous Monitoring: Uncertain events may or may not happen. That they may not happen is not a reason not to watch out for them. Periodically monitor activities during project implementation. Be prepared to review and update your project plans in response to signs of emerging uncertainties. This is like getting an umbrella handy at the sight of clouds forming in case it eventually rains. If it rains, you are prepared; if it does not, you are prepared. 

• Maintain Open Communication: Even though you have a contingency plan and funding breathing in your organization’s bank account, be the first to reach out to the funders and stakeholders when unforeseen events occur. This can provide the project team with insights and expertise to navigate uncertainties effectively.

• Responsive Pivoting: Because it is an uncertain unforeseen event, the extent of its impact is unknown. It is possible that when it happens, the set-aside funds or plan might not mitigate it. There is one more tip to use: pivoting. Upon assessing the impact of the unforeseen event, pivot swiftly in response without compromising project objectives. Back to our AI example above, if the project was initially to train humans on how to do things manually, the project team can pivot to giving the same training but using the latest technology that is AI-enabled. 

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Factors To Consider When Preparing Contingency Budget 

As stated earlier above, the amount of contingency funding required for a grant project depends on some factors. Here are the factors to consider:

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• Project complexity: A highly complex project involving multiple stakeholders and diverse locations may require a higher contingency fund than a project in a single location. A farming project in an entire state will need a higher contingency fund than an education project in two local governments. 

• Level of uncertainty: A project likely to be affected by a natural disaster would require a higher contingency fund than a project affected by economic or political instability. A one-time natural disaster (farm fire or flood) can render an entire farming project a waste but a change in law will still give ample time for pivoting.  

• Historical data from similar projects: If previous projects in a similar location have encountered significant uncertainties or unexpected events, a higher contingency fund may be warranted based on historical data. 

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Conclusion

Contingency funding is an essential component of any project budget to ensure that unexpected events or circumstances do not derail project success. Understanding the distinction between risk and uncertainty and knowing how to manage uncertainties effectively increase the chances of achieving project goals. 

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The difference between a successful and a failed project can simply be the presence or absence of a well-planned contingency fund and plan. Contingency funding serves as a crucial safety net that allows grant projects to adapt and respond to unforeseen circumstances. So, when crafting your next grant proposal, be sure to allocate sufficient contingency funding and develop a comprehensive strategy for managing uncertainties. 

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