Understanding Budget Contingency in Project Management

By Pryastuti Handhayani | Published On: 11 August 2022
Understanding Budget Contingency in Project Management

In formulating a budget for a company or ministry, it must have been called a budget contingency. But before discussing the budget contingency, you need to know the budget. A budget is a plan systematically arranged in numbers and expressed in monetary units for a given period.

Within a budget, there are sometimes work plans and budgets that are a series of processes arranged on a priority scale to achieve a goal, in which case they usually contain annual financial plan documents of each company.

Preparing The Budget

According to PMI, the Budget Work Plan is prepared to achieve budget efficiency for government administration activities and development priorities. The budget practice in the Budget Work Plan document is part of the budget preparation. The stages of budget preparation are divided into demand ceilings, indicator ceilings, budget contingency, and budget allocation ceilings, commonly referred to as Budget Organizer Lists.

1.Ceiling of Need

The figures listed following the needs proposed by the initiator as a List of Proposed Budgeting Activities for the next fiscal year

2. Indicative Ceiling

The figure listed is a reference for the year ceiling planned in the Work Plan and Budget (RKA), which is determined through a Joint Letter of the Minister of National Development Planning/Bappenas and the Minister of Finance with due observance of fiscal capacity and fulfillment of national development priorities. The intended Indicative Ceiling is detailed according to organizational units, programs, activities, and funding indications to support the policy directions that the President has set as material for preparing the Ministry’s Initial Draft RKP and Work Plan.

3. budget contingency

The Ministry’s budget contingency is the highest budget limit allocated to the Ministry in preparing the RKA in the planned year. The Ministry’s budget contingency is ready to based on the Joint Letter of budget contingency, which is determined by the Minister of Finance and the Minister of National Development Planning.

4. Budget Allocation 

Ministry’s Budget Allocation, starting now referred to as Budget Allocation, is the highest limit of expenditure budget allocated to the Ministry. Based on the results of the discussion of the Draft State Budget as outlined in the minutes of the agreement on the Discussion of the Draft State Budget between the Government and the People’s Representative Council of the Republic of Indonesia. 

Preparing the Budget Allocation in the context of preparing the Budget Work Plan in the planned year is designed by considering the budget contingency, adjustments to macroeconomic developments/policies, and new initiatives.

Difference Between Budget Contingency and Debt Ceiling

A budget contingency is sometimes misinterpreted as a debt ceiling, where the budget contingency is a business spending limit based on one or more formulas or limits set by the business. Understanding the various methods companies use to set budget contingency will help you maintain flexibility in your spending without going into debt or looting.

Quoting from bizfluent, the budget contingency is the spending limit. For example, a small business owner might set a limit of One hundred of million Rupiahs on all company expenses for a month or set an upper limit on all types of costs for the year. This ensures that the company does not spend more than it earns based on expected revenue, often estimated based on recent sales. The company may review its annual performance and increase or decrease its budget contingency based on income. This is done by conducting a budget variance analysis. The term “debt ceiling” most often refers to a limit to the amount of money a government can borrow to fund its operations, make future commitments, and pay its debts. The state budget is then created in response to its debt ceiling.

Setting a Budget Contingency

Launching from PMI, one way to set a budget contingency is to develop a limit on the company’s total expenditure. This works best in small companies where the owner or a small group of managers can track all expenses and adjust what different areas or functions spend. For example, suppose a business owner sets an overall budget contingency of One hundred million Rupiahs per month for his company. In that case, he might reduce his marketing budget if labor costs increase that month if that is needed to meet the One hundred of million Rupiahs spending limit.

Another way to use a budget contingency is to set spending limits according to each department in the company. This requires each department manager to create their budget or the owner to create budgets for various functions of their company, such as marketing, IT, sales, and human resources. Some departments may not have budget constraints, such as production or sales, because their performance is tied to sales volume. Others, such as marketing and IT, may have pre-determined budgets if their performance is not affected by increases and decreases in sales volume. Some companies create a capital budget, which sets out expenses for long-term assets such as machinery, buildings, or computer systems. The budget for these expenditures is based on the company’s capital reserves or available credit, not on expected earnings.

Revenue-Based Budget Contingency

Another way to set it is by associating expenses with income. The sales department might be assigned a travel or promotion budget based on a percentage of revenue. If the salesperson has increased sales, his promotion or travel budget will increase. This gives businesses the flexibility to take advantage of windfalls and prevent overspending.

That’s the review of what a budget contingency is and the components of budgeting in it. Hopefully, you will add your insight to create better quality project management.

Constantly update the latest information about project management here with Tomps.id, the flagship for all projects!


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