What Is a Contingency Plan?

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Contingency plans are essential in many industries, from information technology (IT) to food production. As a manager, you may need to know how to develop and execute a contingency plan so you can handle significant issues effectively. Learning why contingency plans are essential for business and how to create one can help you excel in a leadership role. In this article, you can learn why contingency plans are important and review examples of several common types.

What is the definition of a contingency plan?

A contingency plan outlines the steps that a company will take in the event that a specific situation does or does not happen. Also known as plan B, a contingency plan typically has two major goals:

  • To contain the damage to or loss of people and property
  • To continue the company’s primary operations without interruption

Companies can develop contingency plans for negative events, such as market changes or natural disasters. However, they can also create plans for positive happenings, such as investment funds after reaching certain profit goals. Essentially, any situation that exposes a company to risk requires a contingency plan.

What do contingency plans consist of?

Most contingency plans include the following components:

  • Event. Describe the event that should trigger your team to enact the contingency plan, being as specific as possible
  • Response. Explain the strategy that your team should use to handle the situation, including as many steps as necessary
  • Personnel. Clarify who should be responsible for each part of the contingency plan, listing the person who should be informed as well
  • Timeline. Discuss what your team should accomplish immediately and on the first day or week of the plan

Developing a contingency plan requires strong problem solving, decision making and critical thinking skills as well as strategic thinking and planning.

Related: What is Strategic Planning? Definition, Techniques and Examples

Why is a contingency plan important?

Contingency plans are essential for a variety of businesses because they help managers and executives assess and manage risk. Negative contingency plans outline alternate courses of action to take if the first plan fails to produce the expected results, which can decrease risk and make projects more feasible. Positive contingency plans require managers to develop strategies for growing the company and finding new ways to carry out its mission.

Related: The Essential Functions of Management

Tips for making a contingency plan

To make your organization’s contingency plan as effective as possible, follow these tips below:

Consult with colleagues

As you draft your contingency plan, consult with colleagues who could impact its success. You might meet resistance, especially if your colleagues prefer to focus on executing your company’s primary plan flawlessly rather than developing an alternate plan. 

To get your colleagues invested in your contingency plan, try explaining the risks that the company could experience and the benefits of creating a plan B. If you are in a management position, you may also be able to assign your colleagues to contribute input and resources.

Share your contingency plan

Once you have finalized your contingency plan, make it available to all relevant personnel. Provide executives with copies so they understand how your team plans to manage risk. Ensure that anyone responsible for executing part of the strategy understands their role and how to perform it.

Update your contingency plan

Organizations and risks can change over time, so make a point of reviewing your company’s contingency plans once a year. Assess whether your company has additional risks to consider, which may require developing additional plans. 

Then confirm whether your existing plans need an update to the triggers, responses or personnel. Make sure that everyone involved has a copy of the current contingency plan so your team is prepared to handle any situation that arises.

Contingency plan examples

Use the examples below to help your organization handle a potentially risky event:

Staffing contingency plan

Your team might operate efficiently on most days. Without sufficient staff, however, your company’s productivity could suffer, which could delay your upcoming product launch. 

Example of a staffing contingency plan:

  • Event. At least 50% of your team of programmers call in sick on a workday
  • Response. Begin contacting a temp agency or a list of contractors, requesting that they fill in for a day and aim to have at least 75% of programmer spots filled on every workday
  • Personnel. The product team manager is responsible for contacting contractors, informing the product team director about the situation and updating the programmer team
  • Timeline. Start calls immediately after learning about staffing issues, and aim to staff team to 75% within an hour

Related: How Do Temp Agencies Work?

Supply chain contingency plan

To manufacture products, your company may need a constant supply of materials. If your suppliers experience inventory issues, your company could have production and delivery delays, which could lead to angry customers. 

Example of a supply chain contingency plan:

  • Event. A supplier informs your company that the delivery of an essential ingredient will be delayed by a week or more
  • Response. Search for the ingredient at local stores and wholesalers, and purchase a sufficient amount if it costs less than 20% more than the standard supplier price
  • Personnel. Supply chain manager is responsible for finding alternative sources for the ingredient, informing the accounting manager and talking with the marketing manager about informing customers of delays
  • Timeline. Start sourcing the ingredient within the hour, and aim to procure it by the end of the day

IT contingency plan

Your company might strive to keep customer data as secure as possible. If an accidental data breach results in the loss of customer information, however, your company’s reputation and future could be at stake. 

Example of an IT contingency plan:

  • Event. Your company learns that its customer data has been compromised in some way
  • Response. Find the source of the problem, stop the information leak and pursue repairs, then assess the extent of the data breach and the affected customers
  • Personnel. The Chief Information Officer (CIO) is responsible for overseeing security fixes, mobilizing IT staff and clarifying the issue for the public relations team, the Chief Marketing Officer (CMO) is responsible for communicating with customers and the general public
  • Timeline. Start repairing the security issue immediately, and contact the CMO within the hour and aim to understand the extent of the problem and share the issue with customers by the end of the day