Contingency "refers to costs that will probably occur based on past experience, but with some uncertainty regarding the amount.
The contingency allowance is designed to cover items of cost which are not known exactly at the time of the estimate but which will occur on a statistical basis.
This is intended to provide compensation for "estimating accuracy based on quantities assumed or measured, unanticipated market conditions, scheduling delays and acceleration issues, lack of bidding competition, subcontractor defaults, and interfacing omissions between various work categories.
AACE International has defined contingency as "An amount added to an estimate to allow for items, conditions, or events for which the state, occurrence, or effect is uncertain and that experience shows will likely result, in aggregate, in additional costs.
Contingency usually excludes: Some of the items, conditions, or events for which the state, occurrence, and/or effect is uncertain include, but are not limited to, planning and estimating errors and omissions, minor price fluctuations (other than general escalation), design developments and changes within the scope, and variations in market and environmental conditions.
Because management often thinks contingency money is "fat" that is not needed if a project team does its job well, it is a controversial topic.