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What is a Contingency Plan?

The business world can be complicated, and unexpected events can disrupt even the most well-made plans. A contingency plan helps you prepare for unanticipated occurrences that might otherwise cost you time, money or even your entire business. After experiencing the COVID-19 pandemic and seeing how it affected customer experiences and everyday operations, many business owners and managers have begun to consider how to handle unanticipated events.

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What is a contingency plan?

A contingency plan is a specific set of detailed actions that a business uses to reduce the impact of unexpected events. It can be a loose set of guidelines for what to do in an emergency or a more formal plan that sets out the exact steps each person in the organization needs to take should the worst occur.

You might have separate contingency plans for different circumstances, since the steps you need to take differ depending on whether you’re dealing with a natural disaster that has left your physical warehouse in shambles, the unexpected death of a key employee or a sudden change in market conditions that affect your marketing and sales departments. Contingency plans can be created for both major disasters and minor issues.

Keep in mind that your contingency plan is an outline of what needs to happen in an emergency. You may need to create more detailed instructions for specific key individuals in your organization to act upon during a risk event.

Why businesses create contingency plans

Creating contingency plans is part of overall planning for business success, and companies who have these types of plans can significantly reduce the risk of major disruptions. In general, contingency plans are part of good risk management. You should carefully consider all of the potential risks your business might incur and implement processes to minimize these risks in addition to creating a contingency plan of what to do if the event actually occurs. Some specific reasons why a business might need a contingency plan include:

  • The death of a key employee
  • A key employee leaving the company for a competitor
  • A natural disaster that destroys the business location
  • Network failures causing a loss of important data
  • Cyber attacks that result in the exposure of secure data
  • The loss of a key client

Contingency plans aren’t only for negative events and situations. You can also make a contingency plan for things that might potentially benefit your business. A sudden influx of money from proposed government programs or a surge in sales that might come from a marketing effort going viral seem like good problems for your business to have, but if you don’t handle them correctly, you might end up in trouble in the long run.

Planning for unexpected scale-ups in production and determining what to do with any extra profits or grant money before you have it in hand help you maintain smooth operations when things are going especially well. Failing to plan for these things could leave you rushing around trying to figure out how to accommodate your company’s unexpected good luck.

Benefits of contingency plans

The main benefit of developing contingency plans for your company is that these plans save you time and money if unexpected events occur. Your contingency plan helps reduce any disruptions to regular operations and minimizes any risk to your business. With a good plan in place, you can react quickly and change gears as necessary. Your plan can also help you position your business for efficient recovery after a disaster.

Your business also benefits simply from creating contingency plans and having them in place, even if the worst case scenario never comes to pass. These intangible benefits may be as important to your business as the direct benefits you get when a disaster occurs:

Encourage self-assessment

To create a contingency plan, you need to assess the actual risks to your company, which helps you identify areas of concern or things that need attention. As you develop your contingency plan, you may discover specific vulnerabilities you need to address before they become major disasters.

Enhance your trustworthiness

Having a contingency plan shows that your business is forward-thinking and prepared for unexpected events. Clients and vendors can feel comfortable knowing that their personal data or contracts are not at risk because your business already has a plan to deal with potential interruptions.

Reduce workforce stress

When your employees and managers know that there is a plan in place in case of emergency, there’s less stress over the idea that something bad might happen to destroy all of their hard work. During an actual emergency, workers know what to do and who to report to, which can make the event less stressful. Reducing panic in employees and management makes it easier to move from dealing with the emergency to working toward recovery.

Improve your financial position

If you include contingency plans in loan applications or venture capital appeals, you may be viewed as a better risk than a company that isn’t thinking of potential future events. Good planning could mean the difference between getting the funding you need or having to seek out new investors or lenders.

How to create a contingency plan

In most cases, a department head or project manager creates contingency plans for departments or projects under their purview. This step-by-step guide can help you develop a contingency plan that works for your business:

Step 1: Identify the essential components of your business

Consider all aspects of your company and identify which employees, resources and processes you absolutely need to continue operating.

Step 2: Determine your risks

Some things might be self evident, such as the risk of hurricanes disrupting your normal operations if your company is located in an area with frequent storms, but there may be other risks you wouldn’t normally consider. You might need to talk to stakeholders or hire an outside consultant to assess your business for risk.

Step 3: Organize your list of risks into specific categories

Risks come in a variety of forms, but most fall into a few categories. Determine where your risks fit so you can make plans for various scenarios as needed. These are the main categories of risk you are likely to encounter:

  • Financial risks: Unexpected expenditures or budget shortfalls
  • Time risks: Schedule disruptions
  • Technical risks: Cyber attacks, hardware failures and data breaches
  • Environmental risks: Earthquakes, hurricanes, severe storms, floods or weather delays that affect suppliers and customers
  • Resource risks: Losing key employees, machine breakdowns or supply chain failures

Step 4: Prioritize your risks according to impact and likelihood

Put more work into developing contingency plans for events that are more likely to happen and that would cause a large disruption should they occur. Lower-impact, lower-likelihood events may not need as much attention.

Step 5: Determine how to resume normal operations for each risk event

Create a brief outline for each potential event that describes what you need to do to get back on track and who is responsible for implementing those actions. You might want to create a specific contingency team that takes charge in an emergency.

Step 6: Share your contingency plans with essential personnel

Your contingency plan only works if everyone knows their roles and responsibilities in an emergency. Distribute your contingency plan across your company so employees and managers know what to do and who to report to if the plan ever goes into effect.

Step 7: Update your contingency plans on a regular schedule

Circumstances change quickly in business, so you may need to modify or adjust your contingency plans if new risks develop over time. You should also regularly go over the list of employees responsible for each action in the contingency plan and reassign duties if key employees have left the company or moved into another department. Set a specific schedule to regularly review and update your contingency plans so nothing catches you by surprise.

Examples of contingency plans

Contingency plans are specific to your business circumstances. You can use examples of generic contingency plans as a starting point, but you need to consider the precise needs of your company when designing your own. Here are some examples of contingency plans for various emergency situations and business types you can use for inspiration:

Contingency plan for a manufacturing facility experiencing supply chain issues

  • Risk: Supply chain disruption
  • Probability and impact: Medium probability, medium impact
  • Trigger: Supplier informs company that a key component has a delay of one week or more
  • Preparation: Maintain a list of alternate suppliers, including local sources and pricing
  • Response: Supply chain manager should call alternate suppliers and make a purchase if the total cost is no more than 25% over the usual cost
  • Timeline: Sourcing should begin within one hour of identification of a supply issue; alternative supplies should be sourced within 24 hours

Contingency plan for a data services company during a data breach

  • Risk: Data breach results in compromised customer data
  • Probability and impact: Low probability, high impact
  • Trigger: Breach identified by IT staff or reported by clients
  • Preparation: Maintain reliable security protocols and store backups of customer data in a separate secure location
  • Response: Chief Information Officer (CIO) mobilizes IT staff to immediately determine what data was compromised and start implementing a security fix; public relations team interacts with media and sends updates on the current status of the data breach to affected customers
  • Timeline: IT staff should begin work on data breach within 10 minutes of initial identification; PR staff should make a statement within 1 hour of the initial data breach

Contingency plan for an event facility in a weather event

  • Risk: Severe flooding event makes venue unusable
  • Probability and impact: High probability, high impact
  • Trigger: Active flooding at the facility
  • Preparation: Track flood warnings from National Weather Service, maintain alternate locations available for use in an emergency
  • Response: Close the facility and secure the premises; CEO should determine the extent of the weather event and whether rescheduling or relocating is appropriate; in the case of relocating, onsite staff directs supplies and equipment to the alternate location
  • Timeline: Clients and vendors should be informed 24 hours in advance of a potential weather event as identified by the National Weather Service; alternative venue should be secured within 2 hours of the flooding event

Contingency plan FAQs

What are contingencies?

Contingencies are potential events that can impact your business in a negative way. Making plans for what to do in case of contingencies helps keep your business functioning even when external events affect normal operations.

What are the different types of contingency plans?

Some common types are contingency plans for dealing with natural disasters, plans for handling data loss or network breaches, plans to establish alternative organizational structures if key employees are unavailable, and plans for unexpected financial situations regarding your business.

How is contingency cost calculated?

Contingency costs are estimated since you can’t know beforehand what events might disrupt your business. For specific projects, such as construction projects, many professionals set aside 10% of the overall budget to deal with contingencies. Another way to calculate contingency costs is to take a percentage equal to the estimated risk factor for your company. In this case, if you estimate that there is a 15% risk of a disaster that could result in $100,000 in recovery or replacement costs, 15% of that, or approximately $15,000, should be set aside for contingency planning.

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