What term describes the amount of money added to the estimate to cover unknown risks?

What term describes the amount of money added to the estimate to cover unknown risks?

• A. Contingency
• B. Allowance
• C. Escalation
• D. Premium

Answer: (A)

Contingency is the budget reserve set aside to cover unknown risks and uncertainties that could affect cost or schedule. It comes from risk analysis and is intended to absorb surprises that weren’t anticipated when the estimate was made. This differs from an allowance, which covers known unknowns—cost items identified but not yet quantified. Escalation accounts for expected price changes due to market conditions over time, while a premium covers extra costs for insurance or expedited delivery. So, the amount added to cover unknown risks is contingency.

Contingency is the budget reserve set aside to cover unknown risks and uncertainties that could affect cost or schedule. It comes from risk analysis and is intended to absorb surprises that weren’t anticipated when the estimate was made. This differs from an allowance, which covers known unknowns—cost items identified but not yet quantified. Escalation accounts for expected price changes due to market conditions over time, while a premium covers extra costs for insurance or expedited delivery. So, the amount added to cover unknown risks is contingency.