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What is a contingency plan? A guide to contingency planning

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A business contingency plan is a backup strategy for your team or organization. It lays out how you’ll respond if unforeseen events knock your plans off track—like how you’ll pivot if you lose a key client, or what you’ll do if your software service goes down for more than three hours. Get step-by-step instructions to create an effective contingency plan, so if the unexpected happens, your team can spring into action and get things back on track.

No one wants Plan A to fail—but having a strong plan B in place is the best way to be prepared for any situation. With a solid backup plan, you can effectively respond to unforeseen events effectively and get back on track as quickly as possible. 

A contingency plan is a proactive strategy to help you address negative developments and ensure business continuity. In this article, learn how to create a contingency plan for unexpected events and build recovery strategies to ensure your business remains healthy.

What is contingency planning?

What is a contingency plan .

A contingency plan is a strategy for how your organization will respond to important or business-critical events that knock your original plans off track. Executed correctly, a business contingency plan can mitigate risk and help you get back to business as usual—as quickly as possible. 

You might be familiar with contingency plans to respond to natural disasters—businesses and governments typically create contingency plans for disaster recovery after floods, earthquakes, or tornadoes. 

But contingency plans are just as important for business risks. For example, you might create a contingency plan outlining what you will do if your primary competitors merge or how you’ll pivot if you lose a key client. You could even create a contingency plan for smaller occurrences that would have a big impact—like your software service going down for more than three hours.

Contingency planning vs risk management

Project risk management is the process of identifying, monitoring, and addressing project-level risks. Apply project risk management at the beginning of the project planning process to prepare for any risks that might come up. To do so, create a risk register to identify and monitor potential project risks. If a risk does happen, you can use your risk register to proactively target that risk and resolve it as quickly as possible. 

A contingency plan is similar to a project risk management plan or a crisis management plan because it also helps you identify and resolve risks. However, a business contingency plan should cover risks that span multiple projects or even risks that could affect multiple departments. To create a contingency plan, identify and prepare for large, business-level risks.

Contingency planning vs crisis management

Contingency planning is a proactive approach that prepares organizations for potential emergencies by implementing pre-planned risk mitigation strategies. It involves identifying threats and crafting strategies in advance. 

Crisis management , on the other hand, is reactive, focusing on immediate response and damage control when a crisis occurs. While contingency planning sets the stage for effective handling of emergencies, crisis management involves real-time decision-making and project management during an actual crisis. Both are important for organizations and businesses to maintain their stability and resilience.

Contingency plan examples

There are a variety of reasons you’d want to set up a contingency plan. Rather than building one contingency plan, you should build one plan for each type of large-scale risk or disaster that might strike. 

Business contingency plan

A business contingency plan is a specialized strategy that organizations develop to respond to particular, unforeseen events that threaten to disrupt regular operations. It's kind of like a business continuity plan, but there's one key difference. 

While business continuity plans aim to ensure the uninterrupted operation of the entire business during a crisis, a business contingency plan zeroes in on procedures and solutions for specific critical incidents, such as data breaches, supply chain interruptions, or key staff unavailability. 

A business contingency plan could include:

Strategies to ensure minimal operational disruption during crises, such as unexpected market shifts, regulatory compliance changes, or severe staff shortages.

Partnerships with external agencies that can provide support in scenarios like environmental hazards or public health emergencies.

A comprehensive communication strategy with internal and external stakeholders to provide clear, timely information flow during crises like brand reputation threats or legal challenges.

Environmental contingency plan

While severe earthquakes aren’t particularly common, being unprepared when “the big one” strikes could prove to be catastrophic. This is why governments and businesses in regions prone to earthquakes create preparedness initiatives and contingency plans.

A government contingency plan for an earthquake could include things like: 

The names and information of the people designated to handle certain tasks in advance to ensure the emergency response is quick and concise

Ways to educate the public on how to respond when an earthquake hits

A timeline for emergency responders.

Technology contingency plan

If your business is particularly data-heavy, for example, ensuring the safety and cybersecurity of your information systems is critical. Whether a power surge damages your servers or a hacker attempts to infiltrate your network, you’ll want to have an emergency response in place.

A business’s contingency plan for a data breach could involve: 

Steps to take and key team members to notify in order to get data adequately secured once more

The names and information of stakeholders to contact to discuss the impact of the data breach and the plan to protect their investment

A timeline to document what is being done to address the breach and what will need to be done to prevent data breaches in the future

Supply chain contingency plan

Businesses that are integral parts of the supply chain, such as manufacturing entities, retail companies, and logistics providers, need an effective supply chain contingency plan to continue functioning smoothly under unforeseen circumstances.

These plans hedge against supply chain disruptions caused by events like natural disasters or technological outages and help organizations reduce downtime and ensure real-time operational capabilities. 

A supply chain contingency plan could include:

Secure critical data and systems while promptly notifying key team members, such as IT staff and management, for immediate action.

A predetermined list of essential stakeholders, including suppliers, customers, investors, and authorities, should be contacted to inform them about the disruption and steps being taken.

A detailed timeline is essential for documenting the immediate response and outlining long-term strategies to prevent future disruptions in the supply chain.

Pandemic contingency plan

In the face of a global health crisis, a pandemic contingency plan is vital for organizations in healthcare, retail, and manufacturing. This plan focuses on mitigation strategies to minimize operational disruptions and ensure the safety of employees while maintaining business continuity. 

A pandemic response plan could include:

A comprehensive health and safety protocol for employees, which integrates regular health screenings, detailed risk analysis, and emergency medical support as key components.

Flexible work arrangements and protocols for remote operations and digital communication.

A list of key personnel and communication channels for immediate response and coordination.

Regularly reviewing and adapting the pandemic contingency plan as part of an ongoing disaster recovery plan to address evolving challenges and lessons learned.

How to create a contingency plan

You can create a contingency plan at various levels of your organization. For example, if you're a team lead, you could create a contingency plan for your team or department. Alternatively, company executives should create business contingency plans for situations that could impact the entire organization. 

As you create your contingency plan, make sure you evaluate the likelihood and severity of each risk. Then, once you’ve created your plan—or plans—get it approved by your manager or department head. That way, if a negative event does occur, your team can leap to action and quickly resolve the risk without having to wait for approvals.

1. Make a list of risks

Before you can resolve risks, you first need to identify them. Start by making a list of any and all risks that might impact your company. Remember: there are different levels of contingency planning—you could be planning at the business, department, or program level. Make sure your contingency plans are aligned with the scope and magnitude of the risks you’re responsible for addressing. 

A contingency plan is a large-scale effort, so hold a brainstorming session with relevant stakeholders to identify and discuss potential risks. If you aren’t sure who should be included in your brainstorming session, create a stakeholder analysis map to identify who should be involved.

2. Weigh risks based on severity and likelihood

You don’t need to create a contingency plan for every risk you lay out. Once you outline risks and potential threats, work with your stakeholders to identify the potential impact of each risk. 

Evaluate each risk based on two metrics: the severity of the impact if the risk were to happen and the likelihood of the risk occurring. During the risk assessment phase, assign each risk a severity and likelihood—we recommend using high, medium, and low. 

3. Identify important risks

Once you’ve assigned severity and likelihood to each risk, it’s up to you and your stakeholders to decide which risks are most important to address. For example, you should definitely create a contingency plan for a risk that’s high likelihood and high severity, whereas you probably don’t need to create a contingency plan for a risk that’s low likelihood and low severity. 

You and your stakeholders should decide where to draw the line.

4. Conduct a business impact analysis

A business impact analysis (BIA) is a deep dive into your operations to identify exactly which systems keep your operations ticking. A BIA will help you predict what impact a specific risk could have on your business and, in turn, the response you and your team should take if that risk were to occur. 

Understanding the severity and likelihood of each risk will help you determine exactly how you will need to proceed to minimize the impact of the threat to your business. 

For example, what are you going to do about risks that have low severity but high likelihood? What about risks that are high in severity, but relatively low in likelihood? 

Determining exactly what makes your business tick will help you create a contingency plan for every risk, no matter the likelihood or severity.  

[inline illustration] Business impact analysis for a contingency plan (example)

5. Create contingency plans for the biggest risks

Create a contingency plan for each risk you’ve identified as important. As part of that contingency plan, describe the risk and brainstorm what your team will do if the risk comes to pass. Each plan should include all of the steps you need to take to return to business as usual.

Your contingency plan should include information about:

The triggers that will set this plan into motion

The immediate response

Who should be involved and informed?

Key responsibilities, including a RACI chart if necessary

The timeline of your response (i.e. immediate things to do vs. longer-term things to do)

[inline illustration] 5 steps to include in your contingency plan (infographic)

For example, let’s say you’ve identified a potential staff shortage as a likely and severe risk. This would significantly impact normal operations, so you want to create a contingency plan to prepare for it. Each person on your team has a very particular skill set, and it would be difficult to manage team responsibilities if more than one person left at the same time. Your contingency plan might include who can cover certain projects or processes while you hire a backfill, or how to improve team documentation to prevent siloed skillsets. 

6. Get approval for contingency plans

Make sure relevant company leaders know about the plan and agree with your course of action. This is especially relevant if you’re creating team- or department-level plans. By creating a contingency plan, you’re empowering your team to respond quickly to a risk, but you want to make sure that course of action is the right one. Plus, pre-approval will allow you to set the plan in motion with confidence—knowing you’re on the right track—and without having to ask for approvals beforehand.

7. Share your contingency plans

Once you’ve created your contingency plans, share them with the right people. Make sure everyone knows what you’ll do, so if and when the time comes, you can act as quickly and seamlessly as possible. Keep your contingency plans in a central source of truth so everyone can easily access them if necessary.

Creating a project in a work management platform is a great way of distributing the plan and ensuring everyone has a step-by-step guide for how to enact it.

8. Monitor contingency plans

Review your contingency plan frequently to make sure it’s still accurate. Take into account new risks or new opportunities, like new hires or a changing business landscape. If a new executive leader joins the team, make sure to surface the contingency plan for their review as well. 

9. Create new contingency plans (if necessary)

It’s great if you’ve created contingency plans for all the risks you found, but make sure you’re constantly monitoring for new risks. If you discover a new risk, and it has a high enough severity or likelihood, create a new contingency plan for that risk. Likewise, you may look back on your plans and realize that some of the scenarios you once worried about aren’t likely to happen or, if they do, they won’t impact your team as much.

Common contingency planning pitfalls—and how to avoid them

A contingency plan is a powerful tool to help you get back to normal business functions quickly. To ensure your contingency planning process is as smooth as possible, watch out for common pitfalls, like: 

Lack of buy-in

It takes a lot of work to create a contingency plan, so before you get started, ensure you have support from executive stakeholders. As you create your plan, continuously check in with your sponsors to ensure you’ve addressed key risks and that your action plan is solid. By doing so, you can ensure your stakeholders see your contingency plan as something they can get behind.

Bias against “Plan B” thinking

Some company cultures don’t like to think of Plan B—they like to throw everything they have at Plan A and hope it works. But thinking this way can actually expose your team to more risks than if you proactively create a Plan B.

Think of it like checking the weather before going sailing so you don’t accidentally get caught in a storm. Nine times out of ten, a clear sunny day won’t suddenly turn stormy, but it’s always better to be prepared. Creating a contingency plan can help you ensure that, if a negative event does occur, your company will be ready to face it and bounce back as quickly as possible. 

One-and-done contingency plans

It takes a lot of work to put a contingency plan together. Sometimes when you’ve finished, it can be tempting to consider it a job well done and forget about it. But make sure you schedule regular reminders (maybe once or twice a year) to review and update your contingency plan if necessary. If new risks pop up, or if your business operations change, updating your contingency plan can ensure you have the best response to negative events.  

[inline illustration] The easiest ways to prevent contingency plan pitfalls (infographic)

You’ve created a contingency plan—now what?

A contingency plan can be a lot of work to create, but if you ever need to use it, you’ll be glad you made one. In addition to creating a strong contingency plan, make sure you keep your plan up-to-date.

Being proactive can help you mitigate risks before they happen—so make sure to communicate your contingency plan to the team members who will be responsible for carrying them out if a risk does happen. Don’t leave your contingency plan in a document to collect dust—after creating it, you should use it if need be!

Once you’ve created the plan, make sure you store it in a central location that everyone can access, like a work management platform . If it does come time to use one of your contingency plans, storing them in a centrally accessible location can help your team quickly turn plans into action.

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The Easy Guide to Creating a Business Contingency Plan

Updated on: 2 November 2022

How to avoid disasters? Be prepared for them. 

When things are going well, you often forget to plan for the bad times. But when disaster strikes, you could lose everything in a heartbeat.

An earthquake can bring your whole shop to the ground, your biggest client can choose your competitor over you, your system suddenly can crash making you lose important data etc. There are endless possibilities of disasters if you really think about it. 

That’s why lack of a plan can be a disaster of its own. 

Let’s see why you need a business contingency plan and how to create one in a few simple steps.  

What is a Business Contingency Plan? 

But first, let’s define what a contingency plan is. 

A contingency plan is a proactive strategy that describes the course of actions or steps the management and staff of an organization need to take in response to an event that could happen in the future. It plays a significant role in business continuity , risk management and disaster recovery. 

It helps you stay prepared for unforeseen events and minimize their impact. It also outlines a plan for carrying out the normal business operations after the event has occurred.  

It’s also known in names such as plan B, backup plan, and disaster recovery plan. In case your primary plan doesn’t work, it’s time to execute the plan B.

Benefits of a Contingency Plan 

Without a contingency plan you’re opening yourself to unnecessary risks. Here are some important benefits of a contingency plan that you cannot look away from. 

  • Helps react quickly to negative events. As a contingency plan lists the actions that need to be taken, everyone can focus on what to do without wasting time panicking.
  • Having a contingency plan in place allows you to minimize damage that could happen from a disaster and minimize the loss of production. For example if you have emergency generators set up, even during a blackout, your team can work seamlessly. 

How to Make a Contingency Plan 

An effective contingency plan is based on good research and brainstorming. Here are the steps you need to follow in a contingency planning process. 

Step 1: List down the key risks

Identify the major events that could have a negative impact on the course of your business and on the key resources, such as employees, machines, IT systems etc. 

Involve other team heads, subject experts, and even outsiders like business consultants to get a deeper understanding of things that may cause problems and jeopardize the direction.

Use a mind map to organize and categorize the information you gather from the brainstorming session with the staff. You can easily share this with everyone in the organization to get their input as well.

Mind Map for Risk Identification

Step 2: Prioritize the Risks Based on Their Impact 

Once you have created a list of all the possible risks that could occur in different areas of your business, start prioritizing them based on the threat they pose. 

The risk impact probability chart is a handy tool you can use here. It helps you evaluate and prioritize risks based on the severity of their impact and the probability of them occurring.

Risk Probability and Impact Matrix

Step 3: Create Contingency Plans for Each Event

In this step you’ll create separate plans that outline the actions you need to take in case the risks you identified earlier occur. 

Consider what needs to be done in order to resume normal operations after the impact of  the event. 

Here you’ll need to clarify employee responsibilities, timelines that highlight when things should be done and completed after the event, restoring and communications processes and the steps you need to have taken in advance to prevent losses when the event has taken place (i.e. insurance coverage). 

You can use a visual format here to highlight the course of actions. It would be easier for everyone to comprehend.

Business Contingency Plan Example

Step 4: Share and Maintain the Plan 

Once you have completed the contingency plans , make sure that they are quickly accessible to all employees and stakeholders. 

Review your contingency plans from time to time and update them as needed. And it’s a best practice to inform your employees of the changes as well, as it may include updates to their roles and responsibilities.  

What’s Your Take on Contingency Plans?

That is how you make a detailed contingency plan. List down the major incidents that could harm your business operations, prioritize them based on their impact and probability, create an action plan explaining what you should do in case they occur, and review and update them frequently. 

What is the contingency planning process at your organization? Let us know in the comments section below.

Join over thousands of organizations that use Creately to brainstorm, plan, analyze, and execute their projects successfully.

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What Is Contingency Planning? Creating a Contingency Plan

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Table of Contents

What is contingency planning, what is a contingency plan, contingency plan example, how to create a contingency plan, business contingency plans, project contingency plans.

Contingency plans are used by smart managers who are aware that there are always risks that can sideline any project or business. Without having a contingency plan in place, your organization won’t be well prepared for risk management .

The term contingency planning refers to the process of preparing a plan to respond to any risks or unexpected events that might affect an organization. Contingency planning starts with a thorough risk assessment to identify any risks and then develop a contingency plan to resolve them or at least mitigate their negative impact.

Contingency planning takes many shapes as it’s used for helping businesses and projects across industries. Even governments use contingency plans to prepare for disaster recovery or economic disruption, such as those caused by natural disasters.

A contingency plan is an action plan that’s meant to help organizations mitigate the negative effects of risks. In simple terms, a contingency plan is an action plan that organizations should execute when things don’t go as expected.

critical risks and contingencies business plan

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Action Plan Template

Use this free Action Plan Template for Excel to manage your projects better.

Now that we’ve briefly defined what contingency planning is, let’s take a look at a contingency plan example involving a manufacturing project.

Let’s imagine a business that’s planning to manufacture a batch of products for an important client. Both parties have signed a contract that requires the manufacturer to deliver the products at a certain date or there may be negative consequences as stated on the purchase agreement. To avoid this, the business leaders of this manufacturing company start building a contingency plan.

To keep this project contingency plan example simple, let’s focus on three key risks this company should prepare for.

  • Supply chain shortages: The supply chain is one of the most important business processes for this manufacturing company. Therefore, one of the most impactful risks is a raw material shortage which may occur if their main supplier is unable to deliver the materials they need on time. To prepare a contingency action for this risk, the business owners decide to reach out to other suppliers and place standing purchase orders which give them the opportunity to ask for a certain quantity of materials at some point in the future. If the risk of a supply chain shortage occurs, they’ll have multiple sources of raw materials available in case their main supplier can’t keep up with their demand levels.
  • Machinery breakdown: Another risk that might halt production is the malfunction of machinery. To prepare for this, business leaders hire extra maintenance personnel and order spare parts for their production line machinery as part of their contingency plan. If the risk of machinery breakdown becomes a reality, the organization will have the labor and resources that are needed to mitigate it.
  • The team is not meeting the schedule: If the manufacturing team members are failing to meet their goals on time for whatever reason, the manufacturing business will need to allocate more resources such as extra labor and equipment to complete the work faster. However, this contingency action will generate additional costs and reduce the profitability of the project.

ProjectManager has everything you need to build contingency plans to ensure your organization can respond effectively to risks. Use multiple planning tools such as Gantt charts, kanban boards and project calendars to assign work to your team and collaborate in real time. Plus, dashboards and reports let you track progress, costs and timelines. Get started today for free.

ProjectManager's Gantt chart

Like a project plan , a contingency plan requires a great deal of research and brainstorming. And like any good plan, there are steps to take to make sure you’re doing it right.

1. Identify Key Business Processes and Resources

To create an effective contingency plan you should first identify what are the key processes and resources that allow your organization to reach its business goals. This will help you understand what risks could be the most impactful to your organization. Research your company and list its crucial processes such as supply chain management or production planning as well as key resources, such as teams, tools, facilities, etc., then prioritize that list from most important to least important.

2. Identify the Risks

Now, identify all the risks that might affect your organization based on the processes and resources you’ve previously identified. Figure out where you’re vulnerable by brainstorming with employees, executives and stakeholders to get a full picture of what events could compromise your key business processes and resources; hire an outside consultant, if necessary. Once you’ve identified all the risks, you should use a risk log to track them later.

3. Analyze Risks Using a Risk Matrix

Once you’ve identified all the risks that might affect your processes and resources, you’ll need to establish the likelihood and level of impact for each of those risks by using a risk assessment matrix . This allows you to determine which risks should be prioritized.

4. Think About Risk Mitigation Strategies

Now, write a risk mitigation strategy for each risk that you identified in the above steps. Start with the risks that have a higher probability and higher impact, as those are the most critical to your business. As time permits you can create a plan for everything on your list.

5. Draft a Contingency Plan

Contingency plans should be simple and easy to understand for the different members of your audience, such as employees, executives and any other internal stakeholder. The main goal of a contingency plan is to ensure your team members know how to proceed if project risks occur so they can resume normal business operations.

6. Share the Plan

When you’ve written the contingency plan and it’s been approved, the next step is to ensure everyone in the organization has a copy. A contingency plan, no matter how thorough, isn’t effective if it hasn’t been properly communicated .

7. Revisit the Plan

A contingency plan isn’t chiseled in stone. It must be revisited, revised and maintained to reflect changes to the organization. As new employees, technologies and resources enter the picture, the contingency plan must be updated to handle them.

Contingency Plan Template

We’ve created an action plan template for Excel to help you as you go through the contingency planning process. With this template, you can list down tasks, resources, costs, due dates among other important details of your contingency plan.

critical risks and contingencies business plan

A business contingency plan is an action plan that is used to respond to future events that might or might not affect a company in the future. In most cases, a contingency plan is devised to respond to a negative event that can tarnish a company’s reputation or even its business continuity. However, there are positive contingency plans, such as what to do if the organization receives an unexpected sum of money or other project resources .

The contingency plan is a proactive strategy, different from a risk response plan , which is more of a reaction to a risk event. A business contingency plan is set up to account for those disruptive events, so you’re prepared if and when they arrive.

While any organization is going to plan for its product or service to work successfully in the marketplace, that marketplace is anything but stable. That’s why every company needs a business contingency plan to be ready for both positive and negative risk management.

In project management, contingency planning is often part of risk management. Any project manager knows that a project plan is only an outline. Sometimes, unexpected changes and risks cause projects to extend beyond those lines. The more a manager can prepare for those risks, the more effective his project will be.

But risk management isn’t the same as contingency planning. Risk management is a project management knowledge area that consists of a set of tools and techniques that are used by project managers to create a risk management plan.

A risk management plan is a comprehensive document that covers everything about identifying, assessing, avoiding and mitigating risks.

On the other hand, a contingency plan is about developing risk management strategies to take when an actual issue occurs, similar to a risk response plan. Creating a contingency plan in project management can be as simple as asking, “What if…?” and then outlining the steps to your plan as you answer that question.

Using ProjectManager to Create a Contingency Plan

ProjectManager has the project planning and risk management tools you need to make a reliable contingency plan that can quickly be executed in a dire situation.

Use Task Lists to Outline the Elements

Use our task list feature to outline all the elements of a contingency plan. Since a contingency plan likely wouldn’t have any hard deadlines at first, this is a good way to list all the necessary tasks and resources. You can add comments and files to each task, so everyone will know what to do when the time comes.

Task list in ProjectManager

Reference Dashboards to Monitor the Contingency Plan

Our dashboard gives you a bird’s eye view of all of the critical project metrics. It displays live data so you’re getting a real-time look at how your project is progressing. This live information can help you spot issues and resolve them to make sure that your contingency plan is a success. Which, given that it’s your plan B, is tantamount.

ProjectManager’s dashboard view, which shows six key metrics on a project

If you’re planning a project, include a contingency plan, and if you’re working on a contingency plan then have the right tools to get it done right. ProjectManager is online project management software that helps you create a shareable contingency plan, and then, if you need to, execute it, track its progress and make certain to resolve whatever problems it’s addressing. You can do this all in real time! What are you waiting for? Check out ProjectManager with this free 30-day trial today!

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business contingency plan

An overview of business contingency plans

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Natural disasters, data hacking, theft—your organization has likely prepared for major catastrophes.

Less significant events can also be majorly disruptive—say your biggest customer suddenly switching to a competitor or your entire sales staff getting food poisoning at their annual retreat.

Many circumstances have the potential to disrupt, or worse, shut down your business. A business contingency plan can save the day. Follow the steps below to develop a business contingency plan that will help you stay prepared for the worst.

What is a contingency plan?

A contingency plan is a roadmap created by management to help an organization respond to an event that may or may not happen in the future—whether it’s a large-scale event like a natural disaster or a small-scale roadblock like employee theft.

The purpose of a business contingency plan is to maintain business continuity during and after a disruptive event. A contingency plan can also help organizations recover from disasters, manage risk, avoid negative publicity, and handle employee injuries.

By developing a contingency plan, your business can react faster to unexpected events. The faster your organization is able to get back up and running, the less impact you'll see on profits and revenue.

How to write a contingency plan

There are many factors to consider when building a contingency plan. These four steps are a good place to start preparing for the unexpected.

1. Identify the risks

Before you can prepare for a disaster, you need to understand what types of disasters you’re preparing for. Think about all the possible risks to your organization, including natural disasters, sudden changes to revenue or personnel, or security threats.

2. Prioritize the risks

Make sure you spend your time and resources preparing for events that have a high chance of occurring as you write and develop your contingency plan. For example, you may have listed earthquakes as a possible risk. However, if your area doesn't experience many earthquakes, you wouldn’t want to spend all your time preparing for this event. If your area is prone to flooding, you should spend more of your resources preparing for floods.

To determine which risks are more likely to occur, use a risk impact scale . This will help you to estimate the likelihood that an event will occur and determine where to focus your efforts.

risk impact scale

3. Develop contingency plans

Once you’ve created a prioritized list, it’s time to put together a plan to mitigate those risks. As you write a contingency plan, it should include visuals or a step-by-step guide that outlines what to do once the event has happened and how to keep your business running. Include a list of everyone, both inside and outside of the organization, who needs to be contacted should the event occur, along with up-to-date contact information.

You can also create a list of ways to minimize the risk of these events now and start acting on it. 

4. Maintain the plan

Maintenance of your contingency plan is arguably the most important part of the process because it’s where the work happens to ensure you’re always ready.

Review your plan frequently. Personnel, operational, and technological changes can make the plan inefficient, which means you may need to make some changes.  

You’ll want to communicate the plan to everyone who could potentially be affected and clearly define what everyone's roles and responsibilities will be during a time of crisis. 

Buniness contingency plan example

To help you prepare for the unexpected, get started with these business contingency plan examples below. 

business contingency plan example

Ready to get started? Business contingency plans help you prepare your organization to handle anything unexpected. Give your employees a realistic plan for how they should handle any problem that arises. 

risk management process

Learn the 5 steps to an effective risk management process.

Lucidchart, a cloud-based intelligent diagramming application, is a core component of Lucid Software's Visual Collaboration Suite. This intuitive, cloud-based solution empowers teams to collaborate in real-time to build flowcharts, mockups, UML diagrams, customer journey maps, and more. Lucidchart propels teams forward to build the future faster. Lucid is proud to serve top businesses around the world, including customers such as Google, GE, and NBC Universal, and 99% of the Fortune 500. Lucid partners with industry leaders, including Google, Atlassian, and Microsoft. Since its founding, Lucid has received numerous awards for its products, business, and workplace culture. For more information, visit lucidchart.com.

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What Is a Business Contingency Plan?

Small Business Contingency Plans Explained

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A business contingency plan is a course of action that will be taken if an unexpected event occurs that could disrupt the business. It's a backup plan that ensures the business can continue to operate despite an adverse event.

A business contingency plan is a “plan B” or blueprint for how to keep your business running in the event of a natural disaster, major technical issue, or other unforeseen disruption. A contingency plan identifies potential risks to your business and outlines steps your management team and employees can take if confronted with one of those risks. It helps protect the health and safety of your workers after an event has occurred, while also minimizing business interruptions that can result in financial losses. A well-thought-out plan can mean the difference between staying in business and shutting down.

  • Alternate term : Continuity plan

Do You Need a Business Contingency Plan?

Every business should have a contingency plan so it can resume its operations as soon as possible after a disruptive event occurs. 

A plan will save you time and money since you've already decided what resources you need and actions to take to keep your business going. It can also alleviate some of the stress you're likely to feel when disaster strikes. 

Rather than fretting about what you should do, you can simply follow the steps you've laid out ahead of time.

How to Create a Business Contingency Plan

The first step in creating a contingency plan is to determine what risks are most likely to impact your business and the functions they will impact. Think about how your business normally operates and the types of events that could disrupt its major activities. Your risks depend on the nature of your business and your geographical location. For instance, hurricanes and earthquakes are risks in some areas but not others. Here are examples of events that could cause disruptions:

  • Physical damage by fire, windstorm, or other peril to a building that your business occupies
  • Damage to machinery or breakdown of equipment
  • An extended utility outage (electricity, water, gas, or telecommunications)
  • Resignation or extended absence of key employees
  • Damage to your computer system or a data breach
  • Interruption of your supply chain
  • Blocked access to your business location

Some of these events could also have legal implications. For example, all 50 states, along with D.C. and U.S. territories, have laws requiring businesses to notify individuals whose personally identifiable information has been stolen or released in a data breach.

Run an Impact Analysis

The next step is to conduct a business impact analysis so you can predict the potential outcomes of a disruption of one of your business functions or processes. An analysis can help you estimate the operational and financial impacts of a disruption. It can also help you gather the information you will need to develop recovery strategies. Here are examples of the potential operational and financial impact from the disruption of business functions and processes:

  • Lost or delayed sales or income
  • Increased expenses, such as overtime, outsourcing, and expediting costs
  • Regulatory fines
  • Contractual penalties or loss of contractual bonuses
  • Customer dissatisfaction or defection
  • Delay of new business plans  

When estimating the impact of events, be sure to consider timing and duration. 

A hurricane, structure fire, or data breach may have a greater effect on your income or costs if it occurs during your busy season than when business is normally slow. Likewise, a disruption that lasts for a day will have less impact than one that extends for a week or a month.

You can use the results of your impact analysis to rank your risks in order of priority. Risks with the greatest potential impact should be listed first.

One of the easiest ways to write a contingency plan is to use a template, which is provided by several state and local websites including, for example, the one for Cambridge, Massachusetts .

Plan for Continuity

Once you've analyzed your risks and estimated their impacts, you can begin writing your contingency plan. You'll need a plan for each of the risks you've identified. For example, suppose your manufacturing business is highly dependent on a grinding machine. If the machine became inoperable due to physical damage or a malfunction, your business might have to shut down temporarily. You draft a contingency plan outlining steps you will follow if your machine becomes unusable. Your plan, in turn, might include contact information for two companies that rent machines similar to yours.

When writing your contingency plan, be sure to identify specific people who will need to take action. For instance, suppose your firm employs a highly-skilled salesperson named Susan, who generates 50% of your firm's sales. If Susan left your firm or was unable to work for an extended period, your sales would plummet. You know a retired salesperson (Jim) who could step in for Susan temporarily. However, before you include Jim in your plan, you should explain the roles and responsibilities you'd expect him to fulfill and obtain his consent.

Once you've completed your contingency plan, be sure to share it with your managers and staff who will be responsible for implementing it. Ask them for their feedback, as they may think of a potential risk or impact you didn't consider.

Contingency Plan Example

Here's an example of how a company might use a contingency plan.

Tom owns Tasty Treats, a manufacturer of frozen prepared meals. The firm generates 60% of its revenue from sales of frozen pizza, all of which is made at a central location. Tom worries that his business could be severely impacted if a catastrophe occurs at the pizza manufacturing facility and he's forced to shut it down. Tom thinks his biggest risks are fire, windstorm, equipment breakdown, and an extended power outage, and that all have a high probability of occurring. He drafts a detailed contingency plan. Here are the highlights.

Ready.gov. " Business Impact Analysis ." Accessed Jan. 28, 2021. 

National Conference of State Legislatures. " Security Breach Notification Laws ." Accessed Jan. 28, 2021. 

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Contingency Planning

Developing a good "plan b".

By the Mind Tools Content Team

critical risks and contingencies business plan

Fires, floods, tornadoes, pandemics – these are the types of events that we often associate with contingency planning.

But what if your main supplier suddenly goes bankrupt, your entire sales force comes down with food poisoning, or your website is held to ransom by hackers?

Contingency planning isn't just about major crises and natural disasters. It can also prepare you for more commonplace problems, such as the loss of data, staff, customers, or business relationships. That's why it's important to make contingency planning a routine part of the way you work.

In this article, we explore how to create and maintain robust contingency plans, so that you've always got a backup option when things go wrong.

Conducting a Risk Assessment

Every organization faces a unique set of risks that it needs to plan for. The key to identifying yours is to conduct a thorough risk assessment.

The first step is to identify your business-critical operations . These are the key processes and functions without which your organization could not operate – for example, your supply chain, your internet connection, or your ability to comply with legal standards.

Next, identify the threats that could harm each critical operation. These could include the loss of key staff, technical failure, or a change in government policy, for example. (Our article, Risk Analysis and Risk Management covers this process in more detail.)

Chances are, you'll end up with a long list of potential threats. It may be unrealistic to attempt contingency planning for all of them, so you need to prioritize.

Risk Impact/Probability Charts are a good way to do this. These charts help you to analyze the impact of each risk and to estimate how likely it is to happen. This reveals which risks require the expense and effort of risk mitigation. Business processes that are essential to your organization's survival, such as maintaining cash flow and market share, are typically at the top of the list.

Contingency planning is one response to risk. But in some cases, it may be safer or more cost-effective to tackle it in other ways: to avoid the risk, by investing in new equipment, for example; or to share the risk, by purchasing an insurance policy. Or you may choose not to formally plan for some lower-priority risks at all, but to manage them if they do happen.

What Does a Contingency Plan Cover?

A good contingency plan can prevent your business from "going under" when unexpected events occur, so it's vital to ensure that it's fit for purpose.

Here are the key elements to include:

Refer to your risk assessment and impact/probability charts and choose the most damaging or most likely scenarios that you want to plan for. Then, map out what should happen in each case (see examples 1 and 2, below).

Aim to include a broad range of scenarios – for instance, cyber attacks, prolonged staff absences, IT malfunctions, loss of suppliers, serious power outages, or structural problems with your business premises.

Specify what, exactly, will cause you to put your contingency plan into action. If you have a plan for heavy snow, will it be triggered by a severe weather warning, or only by actual snowfall?

One event could also have multiple triggers, each of which initiates a different part of your plan (see example 2, below).

Include a brief overview of the strategy that you will follow in response to the event. This provides a context for the actions that you ask your people to take.

Who to Inform

Identify the people who need to know about what's happened. This could include employees, suppliers, customers, and the wider public, as appropriate. Our article, Communicating in a Crisis , explores how to plan and deliver effective communication in difficult situations.

Also, make sure that you're aware of your legal obligations, and that any incidents are reported to the relevant authorities where necessary.

Key Responsibilities

Define who's responsible for each element of the plan, who will be in charge at each stage, and what you expect them to accomplish. The Responsibility Assignment Matrix and the RACI Model are useful tools here.

State what needs to be done within the first hour, day and week of the plan being implemented.

This could be as simple as, "Inform employees of the situation immediately." But you may need far more detailed timelines for certain situations, such as data breaches , serious workplace injuries, or leaks of hazardous materials.

Also include details of when you would expect normal business to resume, and what will signal that your organization is ready for this.

Contingency Plan Examples

Click on the links below to see two scenarios and contingency plans for an online retailer with an office of 20 employees and a warehouse full of stock.

Example 1 – A Minor Business Disruption

Example 2 – A Significant Business Disruption

These examples show just one possible way to present your contingency plan. You may prefer to use another format, such as a flow chart or slideshow. Choose a style that suits your needs, and one that captures all of the necessary information.

Developing Your Contingency Plan

When you develop your contingency plan, remember that your primary aim is to maintain or restore critical business operations, so look closely at how these might be affected by each scenario.

Be aware of knock-on effects. Will your organization be able to function at full capacity when you implement your "Plan B," or will productivity drop? If so, for how long?

Involve Your People

To answer questions like these, it's useful to consult people from across your organization.

Managers from different departments can advise you on the impact of disruptive events on services, staff, resources, and business functions. And "frontline" employees are often best placed to tell you about the minimum tools and support they require to maintain essential operations.

Take the time to share your plan across your organization, so that people can offer feedback and ask questions. Use this process to make your plan even more robust.

And, if possible, conduct drills to assess the efficacy of your plan. This can highlight areas for improvement, and reveal skills gaps or training needs .

People are often poorly motivated to develop a strong "Plan B." They may already be invested in "Plan A," or they may perceive the risks to be low and see no need for a contingency plan. As such, getting people to contribute to your plan can be a challenge.

To offset this resistance, stress the importance of the task and the potential consequences of not having a plan in place. Lead by example , by completing any contingency-plan-related tasks of your own. And, if it's within your power to do so, set people deadlines for submitting their contribution, or make it a performance review objective.

Keep It Simple

When you write your contingency plan, be sure to use simple, plain language . You don't know when the plan will be used, or who will read and implement it when it's needed. For the same reason, use job titles or roles instead of names when you define people's responsibilities. This will help to keep your plan relevant, regardless of any changes in personnel.

And don't forget that your people are business-critical, too. Sudden, unexpected events can be difficult or stressful for them – and for you. At such times, clear communication is essential to reassure everyone that the situation is under control, and to avoid potentially damaging rumors and gossip. Read our article, How to Keep Calm in a Crisis , for more on this.

Maintaining Your Contingency Plan

Your contingency plan must be reviewed and updated regularly if it's to remain useful and credible.

When you review it, take all relevant technological, operational and personnel changes into account and reassess the risks accordingly. Then, discard old versions of the plan.

The coronavirus pandemic demonstrated how quickly whole organizations can change the way they operate – having everyone suddenly working from home, for example. So bear this in mind when you're writing your contingency plan. It needs to work in any workplace scenario, whether everyone's in the office, everyone's remote, or there's a hybrid approach in place.

When new employees join your organization, provide them with the contingency plan as part of their induction so that they're familiar with it, and so that they know what to do if there's a problem.

And finally, keep your plans safe, and make sure that they're accessible by the right people at the right times. If a crisis occurs, you won't want to be searching for passwords or struggling to give people access rights. Treat your contingency plans with the same care that you give to all your business-critical information.

The specifics of disaster recovery are beyond the scope of this article. For more information on this topic, listen to our Expert Interview with Kathy McKee, Leading People Through Disasters .

Contingency plans are an essential part of risk management. They help to ensure that you've always got a backup option when things go wrong, or when the unexpected happens.

To develop a contingency plan, first conduct a risk assessment: identify your business-critical operations, identify the threats to those operations, and analyze the potential impact of each threat.

Then, include the following points for each threat:

  • Response overview.
  • People to inform.
  • Key responsibilities.

To create the most robust plan, consult widely within your organization, conduct trial runs, update the plan regularly, and store it securely.

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What Is A Business Contingency Plan & How To Create One

Business Contingency Plan

It is the question that haunts business continuity professionals throughout their careers. Of course, there are a million possibilities that might occur at any time. But creating a business contingency plan at least helps you to prepare for the unknown.

Here, we take a look at the basics of business contingency planning , as well as how to create a plan for your own organization.

What is a business contingency plan?

A business contingency plan is a course of action that your organization would take if an unexpected event or situation occurs.

Sometimes a contingency can be positive—such as a surprise influx of money—but most often the term refers to a negative event that affects an organization’s reputation, financial health or ability to stay in business. Examples of a negative event include fire, flood, data breach and a major IT network failure.

Contingency plans are an important part of your overall business continuity strategy because they help ensure your organization is ready for anything. Many large businesses and government organizations create multiple sets of contingency plans so that a variety of potential threats are well-researched and their responses are fully practiced before a crisis hits.

Think of contingency planning as a proactive strategy, whereas crisis management—the other piece of the business continuity puzzle—is more of a reactive strategy. A contingency plan helps to ensure you are prepared for what may come; a crisis management plan empowers you to manage the response after the incident occurs.

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How do i create a business contingency plan.

Creating a contingency plan requires a bit of research and planning. However, working ahead on each plan will be worth it in the long run.

To create a contingency plan for your organization, follow this five-step framework:

1. Identify/prioritize your resources.

First, do a little research throughout your organization to identify and prioritize the resources that your organization cannot do without, such as employees, IT systems, and specific facilities and physical assets.

2. Pinpoint the key risks.

Next, identify the potential threats to these critical resources. Meet with employees, executives, IT and other key personnel to gain a holistic idea of the events that could impact your resources. If necessary, consider bringing in a consultant who specializes in identifying risk.

3. Draft your contingency plans.

Ideally, you would then write out a contingency plan for each of the identified risks. However, it’s best to start with the highest-priority threats—usually those that are most likely to occur and would have the biggest impact. Then, over time you can work toward drafting plans for each lower-priority risk.

As you draft each plan, ask yourself what steps would have to be taken for the organization to resume normal operations. Consider things like communications, employee activity, staff responsibilities and timelines (what needs to happen when). Then, create a step-by-step plan for each risk.

4. Distribute your plans.

Once each plan is completed and approved, ensure that every employee and stakeholder has easy access to it. For this important step, you might consider leveraging  an issue and crisis management app , which provides contingency plans and related documents directly to each employee on his or her mobile device.This approach replaces the traditional hard-copy ring-bound folders and ensures that each employee has access to the most recent plan immediately should the worst happen.

5. Maintain each plan.

Be sure to keep each plan updated as your organization goes through changes, such as hirings and firings and the adoption of new technologies. In addition, rehearse implementation with stakeholders on a regular basis to ensure that each team member knows their role.

What contingencies do you think are most likely to affect your organization? How are you currently preparing for them?

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Contingency planning: 4 steps to prepare for the unexpected

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What is contingency planning?

Why is contingency planning important, 4 steps to develop a contingency plan.

Most days at work are business as usual — you hope. Unfortunately, there are also days where nothing seems to go right. Sometimes, these hiccups are just part of running an organization. And some days, they can be a major disruption in your work.

Because your clients and customers are relying on you to deliver as promised, it’s critical that you have a backup plan in place. There’s no way to prevent all mishaps from occurring, but you can minimize their impact with a little strategic planning .

Rather than waiting for the worst-case scenario to play out, companies — and individuals — can put together a contingency plan. This helps to ensure that normal business operations continue as smoothly as possible.

Learn what a business contingency plan is, why you should have one, and how to start planning in this article.

Contingency planning is a part of a business’ risk management strategy. It’s how companies foresee potential disruptions to the business. 

Contingency planning is an action plan put in place to help individuals, teams, and organizations minimize disruption. In common terms, we think of this as “plan B.” Contingency plans are less about how to mitigate negative events and more about proactively developing problem-solving skills.

While traditionally, contingency planning have been an area of focus for managers and organizations, there are many benefits for individuals as well.

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To understand contingency planning, it’s best to take a broad view. Sure, when companies have a crisis management plan in place, everyone sleeps a little better at night. It’s nice to know that you’ll know what to do if something happens.

But in life — as well as in business — the only real constant is change. As Tina Gupta, VP of Talent and Employee Experience at WarnerMedia puts it , “Change is not something to solve for.” Fear of change and uncertainty leads people to hide from it, interpreting every bit of rough air as a sign of an impending crash.

When you embrace a future-minded perspective , you no longer have to be afraid of uncertainty. Contingency planning becomes a strategy to be proactive instead of reactive . It’s an exercise in looking for ways to thrive instead of survive. 

BetterUp calls this type of person a future-minded leader . Rather than running from potential threats or pretending everything is fine, they cultivate an agile mindset . These people combine optimism, pragmatism, and the ability to envision the future (or, what positive psychologists call prospection ).

Contingency planning example:

Let’s look at how WarnerMedia has been able to embrace contingency planning as a tool to build a psychologically safe environment.

Conducting a risk assessment

Before you can create a contingency plan, you need to identify the risks that may impact your business. The best way to do this is with the support of your team. Hold a brainstorming session where you can talk through recent experiences, upcoming initiatives, and common pitfalls.

This type of risk assessment can't protect you from being surprised. Tomorrow will hold unexpected events, many of which never happened before in your organization (months-long pandemic shutdowns anyone?) Instead think of this assessment as surfacing the things you can prepare for and opening up everyone's imagination to the range of possible obstacles and outcomes. This will prime the pump for awareness, a flexible mindset, and solution-seeking orientation.

Don’t make the mistake of limiting the meeting to just managers. Your entry-level employees and individual contributors will have a lot of insight as to what could happen — and how to handle it.

Companies often make strategic planning an annual event, but you should review your contingency plan more frequently. Risk assessment should ideally be a natural part of planning for every new initiative.

contingency-planning-team-writing-on-a-whiteboard

Here are 4 steps to develop a contingency plan for your team:

1. Identify the triggers

What are the risks? The first step in contingency planning is knowing which scenarios you’re preparing for. It’s impossible to predict everything, but chances are you can think of one (or ten) worst-case scenarios that would throw operations off.

Put these scenarios in order of likelihood. The most probable and important ones will form the backbone of your contingency plan.

2. Examine the situation

In your hypothetical scenario, what would be the most likely course of action? Write that down, but be sure to ask: is it the best course of action? If your new plan is significantly different from what you’ve done before, you’ll want to talk it over with your leaders.

Get your team involved in this stage of the process. One of the benefits of planning in advance is that you have time to brainstorm responses. If the disruption has happened before, ask them what they did to resolve it and what they wish they had done differently.

3. Determine who needs to know

Once you’ve created a viable plan, determine who the stakeholders are. Identify who needs to know as soon as plans change and who will be responsible for kicking plan B into gear. If anyone needs to authorize purchases, provide access to resources, or otherwise support the plan, make sure that they know as well. 

contingency-planning-team-having-a-discussion

4. Practice

If you can, do a practice run of your disaster recovery plan. The specifics will vary depending on the “disaster,” but running through the plan is a useful exercise. It will help you spot areas that you might not be able to predict in advance.

For example, when the coronavirus pandemic sent millions of workers into lockdown, companies that already had remote work policies in place were in the ideal position for the change. Companies that relied on brick-and-mortar workplaces had to quickly develop strategies to ensure remote team members had the technology and support they needed to work from home for an extended period of time. 

How to maintain a contingency plan

In general, it’s a good idea to review your contingency plan on (at minimum) an annual basis. However, there may be other events that might trigger a review of your recovery strategies.

There are three main parts to your plan: the trigger (or unexpected event), the planned course of action, and the people involved. If any of these change, you’ll want to update your plan. 

For example, moving to a new system, platform, or workflow would cause a change in both your Plan As and Plan Bs. If you hire for a new role that sits between functions, that may change the people involved.

Final thoughts

Your business continuity plan isn’t just an exercise in preparedness. It’s an opportunity to help your teams learn how to become more agile and creative problem solvers.

Everyone, from a project management team developing a contingency plan for rolling out a new sales incentive, an IT team planning for a new system to go live, or a manager coaching an employee through creating a contingency plan for meeting work deadlines, needs to develop this skill. In a time of uncertainty and constant change, thinking through possible problems and alternatives in advance is part of life. 

Gupta of WarnerMedia says that empowering her team through coaching has helped them "move from overwhelm to thriving through change." When they trust themselves, the company, and the plan, employees become more confident. They’re more willing to take risks and trust each other.

When things go awry, your plan won’t just minimize the potential impact. It will empower your team to thrive in uncertainty as they respond to whatever gets thrown their way.

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Allaya Cooks-Campbell

BetterUp Associate Learning Experience Designer

It depends. Understanding the contingency theory of leadership

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Mastering Contingency Planning: Expert Strategies, Proven Best Practices, and Testing Techniques for Optimal Results

By Joe Weller | May 9, 2023

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Successful organizations must understand potential risks and have contingency plans in place to address them. We’ve assembled expert tips on effective contingency planning and offer practical insights on how to test those contingency plans.

Included on this page, you’ll find the benefits of contingency planning , steps to take to create a contingency plan, examples of contingency plans , and information on a range of exercises your team can do to test its contingency plans.

What Is a Contingency Plan?

A contingency plan is a proactive strategy that outlines the actions a person or entity will take in response to a potential future event. Businesses often develop contingency plans to prepare for risks and mitigate their impact on the business.

What Is Business Contingency Planning?

Business contingency planning is work an organization does to determine how it responds to future events that might affect the business. The goal is to prepare an organization to respond to negative events and mitigate their impact on the business.

A business contingency plan is a written document that outlines an organization’s contingency planning efforts. It typically includes a comprehensive assessment of possible risks to the business and corresponding measures the organization has planned to mitigate these risks, such as legal and budget contingency.

Why Is a Business Contingency Plan Important?

A business contingency plan is crucial for any organization, as it helps them respond quickly and effectively to negative events. With a solid contingency plan in place, companies can minimize damages and continue to thrive even amid challenges.

While an organization might develop a contingency plan for risks to individual projects or general risks to the enterprise as a whole, business contingency plans refer specifically to general risks to the enterprise. This document details all of the most important risks that a business or organization faces.

In recent years, the importance of business contingency plans has increased significantly. With the rise of climate change, natural disasters have become more frequent and disruptive, underscoring the need for organizations to have effective contingency plans. In addition, the ever-growing threat of cybercrime has further highlighted the importance of contingency planning, as businesses increasingly rely on technology to operate.

Luis Contreras

“Before, you might have said, ‘What are the odds of a 100-year flood?’” says Luis Contreras, President and Principal Consultant for AzTech International , a California consultancy that helps organizations manage large, complex projects. “Well, they are happening more often now. ‘What are the odds of a cyber incident?’ Well, they're happening more often.”

Erika Andresen

Many organizations take steps in their risk management programs to try to completely eliminate certain risks. However, it’s almost impossible for any organization to completely eliminate the chance of a risk happening, says Erika Andresen,  a business continuity and resilience expert, author, and founder of EaaS Consulting . Business contingency planning is important, she says, “because your risk management will fail at a certain point.”

The Benefits of a Contingency Plan

Contingency plans offer several benefits to organizations. They enable organizations to respond promptly and effectively to unexpected events, minimize damages, and facilitate a quick recovery. With a contingency plan in place, organizations can take proactive measures to mitigate risks.

Here are some of the primary benefits of having a contingency plan in place:

  • Improves Event Responsiveness: By having a clear plan in place, there is no confusion and individuals know how to react without blindly searching for direction. This enables the organization to take swift and effective action, minimizing response times and ensuring continuity of operations.

Andrew Lokenauth

  • Facilitates Quick Recovery: Organizations with good contingency plans bounce back quickly from negative events. For example, a severe storm or power outage might have a huge effect on a state or metropolitan area, but businesses that have backup generators and other contingency plans can often resume operations quickly. “It's resilience — it's how your company stays a company,” Andresen says. “That's how the company is able to grow and thrive. You've figured out that you're going to have a risk that is going to impact your operations. And then you worked and took the extra step to put in policies and procedures to get yourself back up and running with minimal disruption.”
  • Decentralizes and Disseminates Important Information: Business contingency planning forces organization leaders to gather people to assess the organization’s potential response to various events. This work necessitates the sharing of important information about the company and its operations, resulting in more people knowing how to assist in the company’s response. Accessible, decentralized information is invaluable in a crisis event or when top leaders in a company suddenly leave.“If you have a company with one or two top leaders, then it makes it even more important,” says Lokenauth. “If one person has all the knowledge, when something happens to that one person, how does the company function?”
  • Gives the Company Confidence in Its Operations: When you create effective contingency plans, you boost the confidence of everyone in the company. You instill a sense of trust that the company will respond well in an emergency. Moreover, you enhance confidence in the company’s overall preparedness, foresight, and integrity.

What Does a Contingency Plan Cover?

A contingency plan covers the important risks the organization is monitoring and any possible triggers to those risks. It also outlines the specific actions organization staff will take to respond to them.

A contingency plan often includes the following components:

  • Triggering Events: Identify the events that can make a risk event more likely to happen, such as weather patterns or market conditions.
  • Response Details: Outline specific actions the organization will take in response to a risk event, including preventive measures and mitigation strategies.
  • Organizational Responsibilities: Detail the roles and responsibilities of key personnel within the organization, such as the crisis management team and first responders. This might include a RACI chart that outlines who is responsible, accountable, consulted, or informed about specific response actions.
  • Key Contacts: Include contact information for key people or organizations that will be involved in the response efforts, such as emergency services, suppliers, and customers.
  • Outside Experts: Identify outside experts or consultants the organization might need to engage for help when responding to the risk event, such as legal advisors, public relations firms, or technical specialists.
  • Response Timeline: Include a timeline that details when certain responses need to happen, such as when to activate the crisis management team, notify stakeholders, or implement recovery measures.

Learn more about important components and how to write an effective contingency plan in this all-inclusive guide to writing contingency plans.

How to Develop a Contingency Plan

Developing a contingency plan begins with identifying and assessing potential risks. Next, teams outline an appropriate response to each risk, including specific actions that need to be taken and who will be responsible for executing those actions.

Steps in Business Contingency Planning

To develop an effective contingency plan, businesses need to follow some critical steps. The process starts with identifying and assessing potential risks and creating a response plan. Teams should then be trained on the plan and continually monitor potential risks.

These are the important steps to creating an effective contingency plan:

  • Identify and Assess Risks: Identify potential risks that could have the most significant impact on your organization. This assessment might involve conducting a business risk analysis to evaluate potential threats, vulnerabilities, and consequences. Learn more about this step in the contingency planning process in this comprehensive guide to risk mitigation .
  • Identify Resources: Identify what resources your organization already has that can help with contingency responses. This might include people, tools, or services that can be used to respond quickly to an unexpected event. Gather and coordinate those resources.
  • Create Contingency Plans: Create a contingency plan for each risk that your organization has identified as critical. This plan should outline specific actions that need to be taken, who will be responsible for those actions, and a timeline for executing the plan.
  • Seek Input and Secure Approvals: Get input from stakeholders and people within your organization on your draft contingency plans. Once you’ve gathered feedback, finalize plans and get approval from the organization’s leaders.
  • Share Your Plans: Communicate your contingency plans to all relevant stakeholders within your organization. This includes making sure that everyone understands what the plans are, what their role is in executing the plans, and any necessary training or resources required to implement them.
  • Perform Training Exercises: Train all relevant staff members on the contingency plans, and make sure they understand their roles in executing them. To test the effectiveness of the plans, perform exercises or drills that simulate potential risk events.
  • Monitor Risks and Contingency Plans: ​​Regularly review and assess business risks to ensure that your contingency plans remain effective and relevant. Evaluate whether the current plan provides the best response to potential risks and consider making updates or modifications as necessary.
  • Create New or Adjusted Contingency Plans as Needed: If your monitoring indicates that your contingency plans require adjustments, take action and promptly update them.

Business Contingency Planning Grid Template

Sample Business Contingency Planning Grid Template

Download a Sample Business Contingency Planning Grid Template for  Excel | Microsoft Word

Download a Business Contingency Planning Grid Template for  Excel | Microsoft Word

Download this business contingency planning grid template to assist your team in identifying potential risks to consider in your organization’s business contingency planning. This template provides a comprehensive list of broad risk categories and specific risks within those categories. By using this tool, you can evaluate which risks are relevant to your organization and develop appropriate contingency plans.

Contingency Planning for IT

Contingency planning in IT follows the same basic steps as other organizations. However, it often begins with a contingency planning policy statement , which outlines an organization’s broad approach to contingency planning.

What to Include in a Contingency Planning Policy Statement

A contingency planning policy statement is a document that outlines how an organization will perform contingency planning. It includes details on objectives, roles and responsibilities, resource and training requirements, testing schedules, and data backup and storage plans.

A contingency planning policy statement should include the following components:

  • Objectives: Describe the organization's overall contingency planning objectives — for example, what types of risks the organization is preparing to address and how the organization's contingency planning efforts align with its overall business goals.
  • Roles and Responsibilities: Outline the specific roles and responsibilities for performing contingency planning within the organization. This should include both high-level positions and specific individuals who will be responsible for carrying out different components of the plan.
  • Organizational Functions and Departments: Identify which organizational functions and departments will be responsible for performing contingency planning. This helps ensure that all relevant areas of the organization are involved in the planning process.
  • Resource Requirements: Determine the resources needed to support contingency planning efforts, including funding, personnel, equipment, and other necessary resources.
  • Employee Training Requirements: Develop a plan for training employees on their roles and responsibilities in the event of a contingency situation. This might include both general training on contingency planning concepts and specific training on the organization's specific plan.
  • Schedules of Exercises and Tests: Establish a schedule for conducting exercises and tests of contingency plans to ensure that they are effective.
  • Procedures for Maintaining and Updating: Develop procedures for maintaining and updating contingency plans over time, including regular reviews and updates to reflect changes in the organization's risk landscape or other relevant factors.
  • Data Backup and Storage: Determine how the organization will back up and store all electronic data to ensure that critical information is not lost in the event of a contingency situation.

A Contingency Plan Model for IT

The National Institute of Standards and Technology (NIST) has created SP 800-34, a popular contingency plan guide for IT. The guide outlines the steps and considerations that organizations should take when developing, implementing, and maintaining an effective contingency plan.

The SP 800-34 guide covers the entire contingency planning process, from risk assessment to plan testing and maintenance. It is widely used as a reference by government agencies, private organizations, and security professionals.

IT Preventive Controls

Any organization’s IT contingency plan should include preventive controls. These are measures an organization can take to prevent interruptions to information services or technology.

 Here are some basic IT preventive controls recommended by the NIST for federal information systems:

  • Uninterruptible power supplies (UPS): To provide short-term backup power to all components, appropriate for the size of your system.
  • Fuel-powered generators: To provide power over the longer term.
  • Air-conditioning systems: Establish adequate capacity to prevent failure of components that malfunction when overheated.
  • Fire and smoke detectors: Install in appropriate locations.
  • Fire suppression systems: Install to minimize potential damages.
  • Water sensors: Place in the ceiling and floor of rooms where computer equipment is located.
  • Containers for backup media and vital non-digital records: Ensure they are heat resistant and waterproof.
  • Master system shutdown switch: Make available for emergencies.
  • Off-site storage areas: Use them for backup media, system documentation, and important non-digital records.
  • Technical security controls: This includes management of cryptographic keys.
  • Frequent scheduled backups of data: This includes information on where the backups are stored, onsite and offsite.

Examples of Contingency Plans

Contingency plan examples can help your team understand what to consider in creating a plan and the important components to include.

You can learn more about contingency planning and download blank and example contingency plans.

Business Contingency Planning Best Practices

To improve your organization’s business contingency planning, experts recommend following a number of best practices, such as performing an effective risk assessment, training employees on the plan, and conducting exercises to test the plan.

These are some best practices to follow for effective business contingency planning:

  • Perform Good Risk Assessment and Analysis: Your team should identify the most critical risks through a thorough risk assessment. This includes analyzing the potential impact of each risk and determining which risks require a comprehensive contingency response.
  • Ensure All Team Members Are Aware of Contingency Plans: Contingency plans will not be effective if the employees in your organization are not aware or have only a vague understanding of them. Incorporate contingency planning into employee training and orientation programs, and communicate regular reminders and updates on the plans through team meetings, newsletters, and other internal communication channels.
  • Train Staff and Conduct Regular Drills: Your organization should train all employees responsible for specific tasks in the plan. Conducting exercises or drills where employees simulate a risk event scenario can help teams identify potential gaps or issues in the plan and improve its effectiveness. Many organizations will complete a business continuity or contingency plan, then “put it on a shelf and say, ‘OK, I did it.’ No, you didn’t,” says Andresen. “You haven't done it. You don’t know what’s in it. You don’t have the muscle memory for what the procedures are. When the disaster happens, you don’t want to be saying, ‘Hold on, let me flip through the pages.’ That's another integral part to business continuity planning or contingency planning: to train the plan and exercise the plan. That’s how you figure out if the plan works.”
  • Continually Review Plans and Make Necessary Adjustments: Drills and exercises are crucial to contingency planning, as they allow organizations to identify which contingency are ineffective and need to be revised. It is essential to modify plans when necessary, whether due to changing risks or other factors. After conducting a drill on a contingency plan, Andresen advises, “Go back and relook at the plan and say, ‘OK, we did this well. This didn't work. This needs to be improved.’” By doing so, teams can ensure that their contingency plans actually work. “This is why this needs to be revisited continuously so that the plan is not just a heavy paperweight,” says Andresen. “Don't break your arm patting yourself on the back that you've accomplished making the plan — actually do something with it.”

Types of Exercises to Test Your Contingency Plan

Conducting a variety of drills and exercises for contingency plans is essential for organizations that want to be prepared for any potential risks. The following chart outlines different types of exercises that can test and improve your contingency plans.

Common Contingency Planning Pitfalls to Avoid

To achieve effective contingency planning, it is important to be aware of common challenges and pitfalls. One such challenge: organizations not allocating sufficient resources to planning and executing responses that are part of the plans.

These are some of the most common challenges and pitfalls to avoid:

  • Lack of Resources Devoted to Contingency Planning and Actions: To create effective contingency plans, organizations must allocate staff time and resources for both planning and response. This includes significant resources to execute the actions required in response to a risk event. Neglecting these necessary resources can result in ineffective contingency plans and costly responses to risks.
  • Lack of Buy-in From Organizational Leaders: Lack of buy-in from organizational leaders often results in a lack of resources. Leaders who don’t value contingency planning might not provide the necessary funding, time, or attention to ensure the plans are effective. This can result in plans that are incomplete, inadequate, or not tested or updated regularly. “Every level of employee is going to look at leadership and see if they take this seriously,” Andresen says. “Is this some simple extra duty? If leadership is saying, ‘No, this is really important, and this is why this is important,’ they get the employees behind that. Then the employees are going to take it seriously.”
  • Bias Against Plan B Thinking: Contingency planning assumes that at some point, an organization’s mission is going to fail. Unfortunately, some organizational leaders have a bias against this, as they perceive it as thinking about a Plan B. However, these leaders must work to understand that having contingency plans is vital for the organization’s future and doesn’t reflect a lack of confidence in Plan A.
  • One-and-Done Contingency Plans: According to Andresen, organizations often develop contingency plans because they are deemed useful or someone within the organization encourages their development. However, these contingency plans are often completed, then disregarded. In order for contingency plans to be effective, organizations must share them widely, train their employees on them, and continuously adapt them to changing circumstances.

Effective vs. Ineffective Contingency Planning Example

The table below demonstrates the varying outcomes between a well-considered contingency plan and one that is less so. The consequences of these differing results can be significant for both the organization and the community.

Resource and Environment at Risk: An oil production facility has above-ground oil flowlines that run for 7,000 feet. The facility is located half a mile west of a major creek and six miles north of a river. The creek flows into the river, which flows into a town of 150,000 people located 12 miles away.

Contingency Plan Purpose: Detect and mitigate any significant oil leak from the facility's flowlines, with the goal of minimizing environmental damage. The plan places a special emphasis on preventing oil from reaching the nearby creek or river.

Business Contingency Plan vs. Business Continuity Plan

A business continuity plan and a business contingency plan share some similarities, but a business continuity plan primarily focuses on how an organization can continue operations during an emergency, whereas a contingency plan addresses a broader range of risks.

  • Business Continuity Plan: A business continuity plan outlines the steps an organization will take to maintain normal operations following a major and disruptive event, such as an earthquake, fire, or major data breach.
  • Business Contingency Plan: A business contingency plan covers a broader range of risks that an organization might face and outlines how the organization plans to respond. These risks can include potential major disruptions or events that might not directly affect operations but still require an effective response.

Business Contingency Plan vs. Project Risk Management Plan

Business contingency plans and project risk management plans both identify potential risks and determine ways to respond to them. The former focuses on risks to the entire organization, while the latter focuses on risks to a particular project.

In a project risk management plan , teams identify and assess possible risks to a specific project. It then determines how project leaders can respond to, eliminate, or mitigate those risks.

A business contingency plan identifies potential threats to an organization's ability to continue operating. It assesses risks that could temporarily or permanently halt operations, and then outlines plans to mitigate or eliminate those risks.

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What Is a Contingency?

  • How It Works

Types of Contingency Plans

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What Are Contingencies and Contingency Plans? Definition and Examples

critical risks and contingencies business plan

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

critical risks and contingencies business plan

A contingency is a potential occurrence of a negative event in the future, such as an economic recession, natural disaster, fraudulent activity, terrorist attack, or a pandemic.

Although contingencies can be prepared for, the nature and scope of such negative events are typically unknowable in advance. Companies and investors plan for various contingencies through analysis and implementing protective measures.

In finance, managers often attempt to identify and plan using predictive models for possible contingencies that they believe may occur. Financial managers tend to err on the conservative side to mitigate risk, assuming slightly worse-than-expected outcomes.

A contingency plan might include arranging a company's affairs so that it can weather negative outcomes with the least distress possible.

Key Takeaways

  • A contingency is a potentially negative event that may occur in the future, such as an economic recession, natural disaster, or fraudulent activity.
  • Companies and investors plan for various contingencies through analysis and implementing protective measures.
  • A thorough contingency plan minimizes loss and damage caused by an unforeseen negative event.
  • Contingency plans can include the purchase of options or insurance for investment portfolios.
  • Banks must set aside a percentage of capital for negative contingencies, such as a recession, to protect the bank against losses.

How a Contingency Works

To plan for contingencies, financial managers may often also recommend setting aside significant reserves of cash so that the company has strong liquidity, even if it meets with a period of poor sales or unexpected expenses.

Managers may seek to proactively open credit lines while a company is in a strong financial position to ensure access to borrowing in less favorable times. For example, pending litigation would be considered a contingent liability . Contingency plans typically include insurance policies that cover losses that may arise during and after a negative event.

However, insurance policies may not cover all of the costs or every scenario. For example, business interruption insurance doesn't usually cover pandemics, which many businesses suffered through as a result of the coronavirus pandemic.

The Federal government had to step in and pass the  Coronavirus Aid, Relief, and Economic Security (CARES) Act , which provided financial relief to businesses, families, and local governments to stem the economic hardship caused by the pandemic. In particular, the Paycheck Protection Program (PPP) offered $349 billion in aid to small businesses to help them maintain their payroll and expenses.

Insurance companies might also limit coverage or put exclusions in place for an act of God, which is an exogenous event, meaning outside of human control, such as a flood or an earthquake. Also, insurance can't replace the customers that were lost to competitors due to an event, particularly if it was an internal systems issue such as a data breach.

As a result, businesses need to have contingency plans established to help minimize the lost revenue and increased costs that are involved when business operations have been disrupted. Typically, business consultants are hired to ensure contingency plans consider a large number of possible scenarios and provide advice on how to best execute the plan.

Contingency plans are utilized by corporations, governments, investors, and central banks, such as the Fed. Contingencies can involve real estate transactions, commodities, investments, currency exchange rates, and geopolitical risks.

Protecting Assets

Contingencies might also include contingent assets , which are benefits (rather than losses) that accrue to a company or individual given the resolution of some uncertain event in the future. A favorable ruling in a lawsuit or an inheritance would be an example of contingent assets.

Contingency plans might involve purchasing insurance policies that pay cash or a benefit if a particular contingency occurs. For example, property insurance might be purchased to protect against fire or wind damage.

Investment Positions

Investors protect themselves from contingencies that could lead to financial losses related to investing. Investors might employ various hedging strategies such as stop-loss orders, which exit a position at a specific price level.

Hedging can also involve using options strategies, which is akin to buying insurance whereby the strategies earn money as an investment position loses money from a negative event.

The money earned from the options strategy completely or partially offsets the losses from the investment. However, these strategies come at a cost, usually in the form of a premium, which is an upfront cash payment.

Investors also employ asset diversification , which is the process of investing in various types of investments. Asset diversification helps to minimize risk if one asset class, such as stocks, declines in value.

Contingent Immunization

Contingent immunization is a type of contingency plan used in fixed-income investing. It involves the fund manager switching to a defensive position if the portfolio drops below a predetermined value.

Business Continuity and Recovery

As part of a contingency plan for disasters, such as a pandemic, companies need to plan ahead to ensure that the business can operate during and after an event. This type of contingency plan is often called a business continuity plan (BCP) or a business recovery plan.

Typically, a business continuity team is formed to plan for any possible contingencies and manage the continuity and recovery plan during a disruption . Businesses need to identify their critical business functions and perform an analysis of how an event might impact the company's operations and processes.

The contingency plan would include implementing the recovery of critical business functions such as systems, production, and employee access to technology such as computers.

For example, a contingency plan for a pandemic would include developing a remote work strategy to help prevent the spread of disease and provide employees with secure access to their work.

As a result, companies would need to invest in technology, which could include providing laptops and video-conferencing access to employees, creating cloud-based data storage, and facilitating access to company-wide communications such as email and internal data.

Cybersecurity

With any type of disaster, cybercriminals often try to take advantage of a crisis to hack into a company’s systems and steal data or disrupt business operations. Contingency plans are used to outline the procedures for cybersecurity teams to protect an organization from threats and malicious attacks.

A contingency plan should also prepare for the loss of intellectual property through theft or destruction. As a result, backups of critical files and computer programs, as well as key company patents, should be maintained in a secure off-site location.

Contingency plans need to prepare for the possibility of operational mishaps, theft, and fraud. A company should have an emergency public relations response relating to possible events that have the ability to severely damage the company’s reputation and its ability to conduct business.

How a company is reorganized after a negative event should be included in a contingency plan. It should have procedures outlining what needs to be done to return the company to normal operations and limit any further damage from the event.

For example, financial services firm Cantor Fitzgerald was able to resume operation in just days after being crippled by the 9/11 terrorist attacks due to having a comprehensive contingency plan in place.

Benefits of a Contingency Plan

A thorough contingency plan minimizes loss and damage caused by an unforeseen negative event. For example, a brokerage company may have a backup power generator to ensure that trades can be executed in the event of a power failure, preventing possible financial loss.

A contingency plan can also reduce the risk of a public relations disaster. A company that effectively communicates how negative events are to be navigated and responded to is less likely to suffer reputation damage.

A contingency plan often allows a company affected by a negative event to keep operating. For example, a company may have a provision in place for possible industrial action, such as a strike, so obligations to customers are not compromised.

Companies that have a contingency plan in place may obtain better insurance rates and credit availability because they are seen to have reduced business risks.

As a result of the financial crisis of 2008 and the Great Recession , regulations were implemented requiring bank stress tests to be performed to test how a bank might handle various negative contingencies. The stress tests project how much a bank would lose—if a negative economic event occurred—to determine if the bank has enough capital or funds set aside to survive the event.

Banks are required to have a specific percentage of capital reserves on hand, depending on the total risk-weighted assets  (RWAs). These assets, which are typically loans, have various risk weightings applied to them.

For example, a bank's mortgage portfolio might receive a 50% weighting, meaning the bank—in a negative scenario—should have enough capital that's valued at 50% of the outstanding mortgage loans.

The capital, called Tier-1 capital , can include equity shares or shareholders' equity and retained earnings, which are accumulated savings of prior years' profits. Although there are various components that go into the tier-capital ratio requirement, the ratio has to be at least 6% of the total risk-weighted assets.

Let's say as an example, Bank XYZ has $3 million in retained earnings and $4 million in shareholders' equity, meaning the total tier-1 capital is $7 million. Bank XYZ has risk-weighted assets of $70 million. As a result, the bank's tier-1 capital ratio is 10% ($7 million/$70 million). Since the capital requirement is 6%, the bank is considered well-capitalized when compared to the minimum requirement.

Of course, we won't know if the banking sector's contingency plan will be adequate until another recession occurs, which is a limitation of these plans since it's difficult to plan for every contingency.

Why Is an Environmental Contingency Plan Important?

Businesses that are at risk for environmental accidents–particularly spills of hazardous materials–should always have a plan in place detailing their response actions. Being prepared can help minimize the total damage done to the environment, minimize accident-related costs, and limit liability.

What Is Contingency Theory?

Contingency theory is an approach to management that suggests the best way to run an organization is dependent, or contingent, on that particular situation. In other words, a specific management style can work well in one company and fail completely in another one.

What Are the Steps in Creating a Contingency Plan?

To create a contingency plan, first, identify the key risks to your business and order them in regard to the likelihood of occurring and severity. Next, conduct a business impact analysis (BIA). From there, start shaping your plan, which should include preventive controls, an incidence response plan, a disaster recovery plan, and a business continuity plan. Make sure to provide training to employees, frequent testing, and updating of your plan.

A contingency is a potentially negative future event or circumstance, such as a global pandemic, natural disaster, or terrorist attack. By designing plans that take contingencies into account, companies, governments, and individuals are able to limit the damage done by such events.

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5 Steps to Create a Contingency Plan for Your Business

Posted may 4, 2022 by sabrina parsons.

critical risks and contingencies business plan

Any business that survived the pandemic had to adjust, readjust, and rethink their business as they dealt with shutdowns, supply chain issues, and ever-changing customer behavior. At the time, it could be seen as crisis or recovery planning . However, intentionally or not, these businesses were proactively creating contingency plans.

What is a business contingency plan?

A business contingency plan is an established strategy or backup plan designed to help organizations respond to possible future events. This contingency planning process encourages you to consider business and financial strategies for potential risks well in advance. It’s basically a lean business plan that takes into account unexpected scenarios that could affect your business. 

Doing so ensures that you aren’t caught off guard. Instead, when a negative event occurs, you can jump right into successfully navigating your business. A contingency plan can even address larger potential issues such as a natural disaster, a global pandemic, or a major security breach. 

Your contingency plan will want to address and cover:

Financial scenarios

Financial “what if” scenarios are based on the contingency you are planning for. The important part is to include your projected Profit and Loss statements as well as your Cash Flow Forecast. Adjust these financial statements around a potential issue to better understand what course of action you’ll need to take.

Are there increased costs of goods and services or do you need to change your pricing? Should you add a fuel surcharge if the contingency involves higher gas prices? 

Strategy adjustments

Understanding the financial effects is the first step. Next, you’ll need to address how you will adjust your business and marketing strategy to navigate the contingency, you are planning for. This is when you go from risk management to creating a plan that helps your business thrive rather than recover.

What changes will you need to make to your staffing, advertising, and marketing budgets? Will you need to change how you sell, market, and support your products and services to address the adverse events? 

Why is a contingency plan necessary?

By putting together a contingency plan and addressing risks to your business, you will be prepared and able to best address those risks when and if they happen. The last few years have taught all small business owners that we have no idea what is ahead. That the best possible way to plan for the future is to be ready for anything. 

A contingency plan for your business will help you step through the what-if scenarios that you might encounter. To start putting together solid plans that will help you overcome risks, fast-track disaster recovery, and even ensure there’s business continuity in place. 

What if gas prices double, and your run a delivery business? A contingency plan could help you model the financial scenario, make sure you have the right access to credit lines to pay for the increased costs, and plan for the right gas surcharge to add to your customer deliveries. 

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How to create a contingency plan for your business

Writing a contingency plan doesn’t have to be a huge or stressful ordeal. All you are doing is taking your lean business plan, and making some adjustments to the strategy and the strategic forecast to plan for uncertainty. Here’s a step-by-step guide to write your own contingency plan.

1. Identify and list the risks

In the past few years, all business owners have experienced risks they never saw coming. Trying to account for everything can be overwhelming and time-consuming. Rather than anticipating anything that could happen to your business, focus on the next few years. 

Start with a comprehensive list, putting everything down that could possibly happen to your business in the next 12-24 months. Loss of an employee, a dip in sales, equipment failure, rising shipping costs, insurance increases, etc. Depending on your business, it may also be beneficial to consider larger unforeseen risks such as natural disasters, cyber-attacks, and economic downturns.

We can all look back at the beginning of the pandemic and learn from the events. Use that knowledge to think about potential future risks and build your list.  

2. Prioritize key risks

Now that you have all those frightening potentials listed, it’s time to prioritize. You need to think about your key risks. The ones that are most likely to happen or will cause the greatest hardship to your business. Realistically you should prioritize no more than 3-5 key risks. 

Remember, you can always use these initial contingency plans to help you explore additional risks. More than likely, several risks will have similar effects on your business functions. It’s much easier to adapt your contingency plans once you have them rather than starting fresh every single time. 

3. Outline contingency plans for each risk

Now that you’ve done the prep work, it’s time to jump into developing your plan. Take your prioritized list and focus on building contingency plans that outline how you and your business will tackle each risk. Here is what you should include in your contingency plan:

Financial forecasts for each risk

To truly understand how a specific risk impacts your business operations, you’ll need a full financial forecast . This will account for what the risk will do to your revenue, expenses, or both. Having a clear picture of your potential financial situation will help you answer questions such as:

  • Will you have enough cash to address the risk? 
  • How does the risk affect your ability to collect cash, and pay your bills?
  • Are there any obvious costs that you can minimize or cut? 
  • Do you need to consider expanding a credit line or applying for a loan?

Don’t worry about creating these forecasts from scratch. Instead, start with your current financial forecasts, make a copy, and adjust projections based on what you expect to happen. Be sure to take note of what adjustments you make. This will make it far easier to update your forecast scenarios whenever you bring in more recent real-world performance data for your business. 

Looking for a better solution? Learn how you can save more time and ensure greater accuracy when adjusting to actual performance using LivePlan .  

The one-page plan

With your forecasts in place, you can begin to define the actions you will take. Keep things simple and easy to follow by creating a one-page strategic plan for each risk. In it, you’ll address how the effects of each risk will impact your operations, sales, marketing, milestones, and even funding needs. This will help you answer questions such as:

  • What strategies in marketing and sales have to be changed or adjusted? 
  • Do you have to hire new people? 
  • Do you need to reduce costs and expenses to survive the risk? 
  • What are the roles and responsibilities required to address the risk?

Document your 12-24 month road map and the key changes you need to implement to keep your business healthy. Keep it lean and actionable to ensure that you and your team will actually be able to use it when the time comes. The LivePlan Pitch page is a perfect place to outline your one-page strategy. 

4. Connect them to your overall business plan

You’ve considered the risks. You have contingency plans in place that include financial forecast scenarios and a one-page action plan. It’s now time to connect your contingency plans to your overall business strategy and business plan. 

Ideally, you should have a simple, lean business plan that is helping guide your business over the next 12-36 months. If not, take 30-minutes to develop one based on your current expectations for your business. This will make it far easier to update and use when facing the risks you’ve identified.

Take this business contingency plan example for instance. If your unexpected event is about a financial risk (such as a dip in sales), connect that contingency plan with your financial plan as a potential fork in the road. You can easily do this same exercise with the two to three more contingency plans you have already built out. 

The end goal is to make this quick and painless so that you can spend less time planning and more time acting when a crisis you’ve planned for occurs. 

Think of it like attachments for a tractor. Where you have all of the right buckets and tools to get your yard in tip-top shape. You’re prepared to jump right in and take on everything from mowing and digging to laying down new gravel. All you need to do is add the right attachments ahead of time. That’s exactly how you want your contingency plans to function with your current plan. 

5. Share, review and revise

Once you have integrated the contingency plans into your overall business plan, it’s time to get your team on board. You want to be sure that they understand the ins and outs of your business plan, and how each contingency should be executed when the time comes. 

So how do you get your team on board? Try these three simple steps:

  • Share the plan with the contingency plans integrated into the appropriate places. 
  • Invite team members to a meeting where you can present the business plan, the potential unexpected events your business might have to face, and the contingency plans that outline how you navigate around them. 
  • Set the expectation with the team for regular, monthly review meetings. This is where you can review business health, compare actual results to the planned results and assess the need to implement a contingency plan.

You can check out our guide on how to conduct a monthly plan review meeting for a more thorough explanation of how to set up this process. 

Preparation is everything

The hard work is done. You have thought about potential hurdles your business might face and you have a plan. Your team is engaged and you now have a regular review schedule in place to keep your business on track. 

All you have to do now is implement your lean business plan, watch for obstacles, and be ready to use your contingency plans if needed. Don’t worry, your regular review meetings will help you track your actual results against your plan and will give you an opportunity to revise your plan if need be.  Check out how LivePlan can help simplify this process and help you make better business decisions in any scenario.

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Sabrina Parsons

Sabrina Parsons

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Businesses need to have a plan in place to get back on track when a disaster interrupts daily operations. Contingency plans, also known as “business continuity plans,” "emergency response plans” and “disaster recovery plans” help organizations recover after a disruption. Whether they’re preparing for a global outbreak of a deadly virus, crisis management around a data breach or simply the loss of an important client, contingency plans help organizations get back on their feet after a negative event.

Companies create many kinds of recovery strategies for everything from the merger of key competitors to the insolvency of the bank used to process its employee payroll. In India, the government was busy designing a contingency plan as a drier-than-expected monsoon season approached.¹ Meanwhile, in Hong Kong, a large bank was preparing a plan b in case a host of new sanctions were levied as the result of a recent geopolitical development.²

Here are five steps companies use to create effective business contingency plans.

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The contingency planning process begins with a risk assessment to gauge the potential impact of each risk. Typically, risk analysis is conducted by business leaders and employees. Team members begin with a brainstorming session where they discuss potential risks, courses of action and the company’s overall preparedness. During this stage it’s important to be clear about the scope of the project and invite all relevant stakeholders to give input. Companies don’t need to create a risk management plan for every threat they face, just the ones deemed highly likely and with the potential to interrupt business operations.

Effective business impact analysis (BIA) is critical to understanding different business functions and how they will react to unexpected events. For example, while a shortage in micro-processors might be devastating to a part of a business that deals with the manufacture of gaming consoles, it likely will have little to no impact on the same company’s HR department.

To assess the urgency of creating an action plan for this specific threat, the company would need to know how much of its revenue was being generated from the part of the business threatened by the microprocessor shortage. If gaming consoles are a high percentage of their revenue, they’ll want to make sure they have a strong plan in place soon. A well-developed BIA helps stakeholders assess risk and better understand which parts of their business are most critical to daily operations.

After identifying the risks their company faces, determining the likelihood and severity of each risk and conducting a BIA, business leaders can follow a simple, three-step process to build their backup plan.

Identify the triggers that will set their plan into action: For example, if a hurricane is approaching, at what point does the approaching storm trigger the contingency plan? When it’s 50 miles away—100? They’ll need to make clear decisions so the teams they put in charge of execution will know when to start their work.

Design an appropriate response: The threat the business prepared for has arrived. Teams will need to know exactly what’s expected of them so the company can recover quickly. They’ll need clear, accessible instructions, protocols that are easy to follow and a way for everyone to communicate with each other.

Delegate responsibility clearly and fairly: Like any other initiative, contingency planning requires effective project management to succeed. In the case of an existential threat such as a natural disaster, everyone involved in helping the company recover needs to know their role and have received the proper training necessary to perform it. For example, in the case of a fire, it wouldn’t be fair to expect employees untrained in firefighting to pick up a hose. However, with the right training, they could conduct headcounts or go floor-to-floor to ensure other employees have evacuated.

One way to improve workflow among teams when designing a plan is to create a RACI chart. RACI stands for responsible, accountable, consulted and informed and is a widely used process to help teams and individuals delegate responsibility and react to crises in real time.

While it can be hard to justify the importance of putting financial resources into something that might never happen, these past few years have taught us the value of good contingency planning. Think of all the supply chain problems, critical shortages of personal protective equipment and financial havoc wreaked by the pandemic. What would have been different if organizations had had effective contingency plans in place for the kinds of threats they faced?

Cost and uncertainty are big barriers when it comes to convincing business leaders of the importance of making an investment in contingency planning. Since all costs for contingency plans are estimated—there’s no way of knowing precisely how events will disrupt a business—decision makers are understandably hesitant.

Different industries have different ways of approaching this problem. In the construction industry it’s common to set aside 10 percent of the overall budget of a project for contingencies. Other industries use different methods. One popular method estimates risks according to a percentage of how likely they are to occur. By this method, if there’s a 25 percent risk of an event occurring that will result in USD 200,000 in recovery costs, the company must set aside 25 percent—or USD 50,000—to be in compliance with their contingency plan.

Markets and industries are constantly shifting, so the reality that a contingency plan faces when it is triggered might be very different than the one it was created for. For example, after the 9/11 terror attacks, many of the contingency plans that the U.S. government had in place were suddenly irrelevant, because they had been prepared decades before.

To avoid a similar disconnect between plans and threats, businesses need to constantly test and reassess the plans they’ve made. For example, IBM’s guidelines mandate that plans should be tested at least once annually and improved upon as necessary.³ If new risks are discovered and their severity and likelihood is deemed high enough, the old plans might be scrapped altogether.

When businesses are hit with an unexpected disruption, a strong contingency plan gives much-needed structure to the recovery process. Disruptive events cause chaos and decision makers and employees are often left scrambling to understand what is happening and how best to respond to it. Having a strong plan to turn to can help restore confidence and show the way forward.

Here are a few benefits business leaders who create strong contingency plans can expect:

Businesses that create strong plans recover faster from a disruptive event than businesses that don’t. When a negative event occurs, the faster the business recovers and gets back to business-as-usual, the lower the risk to the company, its customers and its employees.

A good contingency plan minimizes the damage to a company—both reputational and financial. For example, while a data breach will undoubtedly damage a bank’s reputation, as well as its bottom line, how the bank responds will play a critical role in whether its customers decide to continue doing business with it.

Many organizations use a strong contingency plan to show employees and customers that they take preparation seriously. By planning for a wide range of potentially damaging events, business leaders can show investors, customers and workers that they’ve taken the necessary steps to minimize risk.

Many plans focus on natural disasters such as floods, earthquakes or fires. Others deal with data breaches, unexpected network downtime or the loss of a key employee such as a CEO or founder. Here are a few examples of contingency plan templates that deal with broadly different scenarios across a range of industries.

Severity and likelihood of risk: The manufacturers have been following the news in a region where they source specific airplane parts and have deemed the likelihood of disruption there “high.” They initially conduct a search for another supplier but quickly learn that it will take months—even years—to find one. Since the part is necessary for the construction of all their airplanes, they label the severity of this disruption “high” as well.

Trigger: Suppliers make the manufacturer aware that they will soon run out of the needed part due to a disruptive geo-political event in its country of origin.

Response: The manufacturer begins the search for a new supplier of the much-needed part in a more stable country.

Severity and likelihood of risk: The managers of a bank know of a vulnerability in their app that they are working to fix. If the app is hacked, and their information systems are compromised, they are likely to lose vital customer data. They rate the likelihood of this event as “high” since, as a financial institution, they are a desirable target. They also know from watching their competitors face similar situations that the potential for disruption to their business in an event like this is great. They rate the severity of this risk as “high” as well.

Trigger: IT makes the bank’s managers aware that the bank’s app has been hacked and their customers’ data is no longer secure.

Response: The app is immediately shut down and customers are notified that their data has been compromised. They are made aware of the steps the bank is taking to ensure that they have access to their money and that their personal information is not available to anyone on the dark web. An on-call team of security experts that has been specially trained for this scenario is brought in to restore the banks systems and secure customer information.

Severity and likelihood of risk: The plant’s managers know that severe flooding could spread un-treated water into the city’s streets and public waterways. Both the severity of this risk and its likelihood given the impending storm are deemed “high. ”

Trigger: The hurricane’s path turns towards the city and approaches to less than 100 miles away with wind speeds higher than the threshold rated “safe.” The plant’s contingency plan is put into action.

Response: All necessary workers are recalled to the plant 24/7 and measures are taken to treat as much of the water as possible before the hurricane arrives. According to their plan, whatever is left over will be pumped into holding tanks that are designed to withstand a hurricane. When windspeeds rise to a certain velocity, the plant itself is shut down and all workers evacuated.

Help your business respond quickly to changing conditions with IBM Maximo, an integrated cloud-based solution that harnesses the power of artificial intelligence (AI), Internet of Things (IoT) and advanced analytics to maximize performance and minimize costs and downtime.

Learn more about the process of disaster recovery planning and Disaster-Recovery-as-a-Service.

Discover how global supply chains responded to the COVID-19 pandemic and are developing better ways to balance efficiency and resilience.

See how businesses are leveraging AI and other emerging technologies to maintain business continuity amid disruption and uncertainty.

Explore the business continuity measures IBM takes to help prevent or reduce the impact of potential threats.

Unlock the full potential of your enterprise assets by using IBM Maximo Application Suite to unify maintenance, inspection and reliability systems into one platform. It’s an integrated cloud-based solution that harnesses the power of AI, IoT, and advanced analytics to maximize asset performance, extend asset lifecycles, minimize operational costs and reduce downtime.

1  “ El Nino contingency plan being readied for farmers & output ” (link resides outside ibm.com) Elara Securities Pvt Ltd. April 27th, 2023

2  “ HKMA has prepared contingency plans in case of severe sanctions ” (link resides outside ibm.com) UBS Global Research and Evidence Lab, May 5th, 2022

3  “ IBM business continuity management position paper ” IBM Global Technology Services thought leadership white paper, September, 2019

SitelogIQ

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critical risks and contingencies business plan

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critical risks and contingencies business plan

Emergency contingency planning is crucial to every business and facility. Disasters and emergencies can occur at any time, and without the proper safeguards in place, a company can sustain significant damage to its bottom line, workforce, and reputation. Conducting a risk assessment and creating response plans can be time-consuming and expensive when done alone. However, employing an experienced and successful company for contingency planning and risk management can make a considerable difference in your disaster mitigation efforts.

Here is some guidance on how to strategize for and protect against events that could disrupt your operations — plus how you can benefit from hiring an external party to handle your safety contingency plans and risk reports.

  • Purpose of a Contingency and Risk Assessment Plan

Types of Potential Emergencies

  • Contingency Planning Services
  • Emergency Preparedness Plan and Preparation

Purpose of a Risk Assessment and Contingency Plan in Risk Management

What is an emergency preparedness plan? It is a detailed strategy for protecting your business against external risks and emergencies, such as natural disasters. Creating a risk assessment plan and contingency report involves identifying the potential risk areas to create an effective response should those problems develop. These plans involve members on every level of an organization, from CEOs to entry-level employees, to inform these individuals of what to do in case of an emergency or impending event.

The essential steps to creating a contingency plan for risk management involve pinpointing what risks are most likely to disrupt your company — otherwise known as the risk assessment. Then, you must define how severe of an impact each of these risks will have and sort them into appropriate categories. Which ones will have the most devastating effects should they occur? These top priority concerns will require the most detailed action plans.

Once a business discovers what its risks are, it can go about addressing them in numerous ways. This stage is where you would begin building a contingency plan for how to approach the risk. How you respond will depend on multiple factors, such as how much risk your business is willing to take and what kind of risks you’re confronting. After you conduct emergency contingency planning and establish an effective set of methods, this strategy will need to be updated every year or so to ensure its timeliness and relevance.

Many types of emergencies can threaten a business, though we will primarily focus on two within this post — pandemics and natural disasters.

In the face of both pandemics and natural disasters, you should have an emergency preparedness plan for the workplace that includes  protective actions for life safety , as defined by the Department of Homeland Security. These measures can include lockdowns, shelter-in-place orders, and evacuations — actions that are meant to protect the lives of every person within a facility.

Natural disasters happen quite frequently, especially depending on where your business is located, but you may have little experience with planning for a pandemic. The elements of a risk mitigation and response plan for a pandemic will include many of the same components you’d employ for other types of emergencies. Your risk assessment and contingency plan should contain an executive summary, stakeholder commentary, funding, and health safety information.

Every risk analysis — including pandemic-based plans — should merge the below concepts into a singular, detailed strategy for your business or facility to operate from:

  • Design and engineering
  • Procurement and construction management
  • Cost estimating
  • Identification of funding and regulatory limitations
  • Master planning
  • Maintenance planning
  • Public discussion facilitation

critical risks and contingencies business plan

Pandemics can disrupt workplaces in numerous ways. Supply chains halt their normal operations, and employees miss work because of dealing with illness or caring for others.  Pandemic planning  addresses these issues while also considering the health and safety of everyone within your workplace or facility. Here are some best practices to keep in mind when strategizing for specific events like pandemics:

  • Know the right information:  Review local and federal health and safety guidelines to ensure your business is compliant with these measures. Train your employees on how to uphold these guidelines and any company-specific techniques you’re adopting to protect workers and clients.
  • Create business and facility guidelines:  Establish policies that will protect employee well-being, such as mental health initiatives and sick policies that avoid penalizing anyone who falls ill. Develop a social distancing plan that will enable your workers and consumers to interact without the risk of transmitting infection.
  • Develop an essential team:  It may be necessary to downsize your workforce and only maintain vital positions to avoid disease spread or prevent your business from falling into debt. In this case, it should be a priority to cross-train essential workers so they’ll be prepared for additional job duties.
  • Gather supplies:  Make sure you have enough cleaning supplies and items like hand sanitizer, soap, and personal protective equipment (PPE) for every person. Consider each item’s shelf life and recommended storage conditions to ensure your goods last for as long as possible.
  • Identify risks with a risk report:  Analyze your business or facility for potential health risks — do employees frequently interact with members of the public? In unprotected environments, it is more likely for someone to fall ill. Enforce social distancing and the necessary hygiene methods, but also be sure to work with your insurance company and local health agencies to provide your workers with medical care.

Natural Disasters

Natural disasters can come in the form of tornadoes, hurricanes, floods, earthquakes, and many more events. Each type of natural disaster requires its own emergency plan for optimal preparedness and disaster mitigation, as they all bring a unique set of circumstances. For example, you might find it necessary in your risk reports to invest in commercial flood insurance if your facility is located in an area that often experiences floods.

You can also sign up to receive alerts from your local community warning service or follow a federal service like the National Oceanic and Atmospheric Administration (NOAA) Weather Radio. You should create and regularly practice  flash flood evacuation plans  that include emergency functions and specific exit procedures. This natural disaster is only one example of the kind of planning you might do when facing a weather event. Familiarize yourself with the most common disasters and mitigation strategies in your region.

You can use  a FEMA emergency preparedness plan  to help you pinpoint specific risks and brainstorm actionable items for addressing these issues. FEMA categorizes disasters as recurring events  consisting of four phases  — although some businesses split them into five and alter the order of steps as necessary:

critical risks and contingencies business plan

  • Prevention:  This phase involves many of the actions outlined in this article, such as preparing for disasters to reduce losses. Running risk analyses helps your business identify concerns and begin answering them. A planning team should be created with a representative from every department in your company to perform assessments.
  • Preparedness:  Preparedness prioritizes ongoing strategies such as employee training and emergency planning. Business leaders and workers must be able to recognize threats early on so they can respond accordingly. Emergency preparedness planning for disaster response should always account for human, business, and property impact.
  • Response:  The emergency procedures you establish determine how you respond to sudden risks. If your company’s supply chain faces significant downtime due to the wide-reaching effects of a natural disaster, how will you pivot to keep operations flowing efficiently?
  • Recovery:  The recovery phase involves the restoration of day-to-day services, allowing companies to return to normal operating procedures as soon as possible. This stage will often involve the use of post-emergency services and insurance policies, as well as your company’s legal team.
  • Mitigation:  Mitigation involves lessening the loss of life and assets. Through protecting employees and facilities, businesses can reduce the severity with which they’re affected by a natural disaster or other phenomena. This step can include restructuring emergency plans to better serve real-life scenarios and developing improvement strategies to address gaps in current plans.

SitelogIQ’s Contingency Planning Services

SitelogIQ offers a three-tiered contingency plan for businesses looking to protect their employees and their assets on a long-term scale, especially during these current uncertain times. Because no single solution can fit every business, we work with your company or facility to develop a plan that suits your specific needs.

Tier 1 — Engineered Infection Protection (EIP)

The first level of our multi-tier approach involves our pathogen mitigation plan, which helps you sanitize and restore your facility both now and in the long term. As a part of this tier, we offer deliverables such as an EIP Selection Matrix, which we build by visiting your facility and conducting engineering work. Other deliverables include a five-year, long-term facility maintenance tool with EIP measures and funding sources to keep your facility well-maintained long after the initial pandemic.

As an added option, you can load your five-year plan into our proprietary database using data entry only, which requires less effort and time. Adopting such a tool can help you manage committed costs and maintain your existing assets, keeping your building safe and energy-efficient. Your long term maintenance strategy can become part of a  master plan intended to facilitate long-term upgrades and improvements within your business. Your master plan will share several common elements with your emergency preparedness and safety contingency strategy, including risk identification and mitigation.

Advantages of adopting EIP include:

  • Low barrier to entry:  There are no intricate or lengthy processes involved in using our planning services. By providing a low barrier to entry, we can get you started on emergency contingency planning quickly and easily.
  • Trust building:  Because we conduct every step of the process — humidification, filtration, ultraviolet germicidal irradiation (UVGI), and more — we keep ourselves transparent so you are always aware of the next steps.
  • Custom solutions:  Our surface and airborne contamination solutions can adjust to fit your facility and provide the most effective cleaning and decontaminating power for your needs. Cleaning technologies we use include electrostatic and ultra-low-volume (ULV) fogging and UVGI.

Tier 2 — Policy Implementation Plan

The second level of our approach includes implementing policies that will enable everyone in your workplace to have a standard protocol for pandemic management. This solution allows you to access deliverables such as color-coded floor plans to enforce social distancing and design documents for facility modifications. These modifications can apply to room layouts, improved protective measures for employee and visitor well-being, and many more safety features.

critical risks and contingencies business plan

We provide services that will help you plan for social distancing in learning environments, food services businesses, and the busing industry. Whichever sector you’re part of, you can benefit from SitelogIQ’s plan. By choosing our policy implementation plan, you will also receive recommended architectural modifications and measures.

Tier 3 — Installation of Protective Measures

Once you have chosen your preferred protective measures, SitelogIQ will install these components. We use both GS schedules and external service providers (ESP) for procurement. When you choose our contingency planning services, you receive a customized plan that accounts for all local conditions, including:

  • Signage and wayfinding plans
  • Cost assessment
  • Site, campus, and room plans
  • Funding plans
  • Procurement list
  • Ramping and toggling plans

SitelogIQ offers multiple construction management solutions — Agency Construction Management, Construction Management At-Risk, and Program Management. Here’s a look at what each one offers during the building process:

  • Agency Construction Management:  This solution works as  a fee-based service  that provides you a highly experienced and objective advocate throughout the process. SitelogIQ serves as your Agency Construction Manager (ACM) by walking you through each step and taking every action within your best interest. Our in-house team offers numerous high-quality services for each phase — preconstruction, construction, and close-out.
  • Construction Management At-Risk:  When you choose this solution, SitelogIQ will work with you as the Construction Management At-Risk Provider during the preconstruction phase. You’ll receive services such as cash flow analysis, value engineering, and scheduling. Once things move into the construction phase, we continue conducting the building process until completion.
  • Program Management:  SitelogIQ  manages the entire project team , including the design team and other vital members, to help you organize your system under a single entity. We hire your architects, engineers, and other contractors and perform contract administration with everyone on your team. By choosing program management, you can increase your operational efficiency and eliminate high contingency expenses.

Let SitelogIQ Coordinate Your Emergency Preparedness Plan and Preparation

If you need assistance with conducting a business risk analysis and creating a contingency plan customized for your local conditions, SitelogIQ will guide you through every step of the process. We are a full-service facility planning , design, and management company with expert-level knowledge in facility maintenance and construction. Our team consists of architects, energy managers, engineers, and many more individuals with extensive experience in facility creation and upkeep.

critical risks and contingencies business plan

Our experience with facilities in various disciplines — including healthcare , education , government , and more — ensures we will deliver a customized and efficient project no matter what kind of facility you own. Learn how to manage pandemics, natural disasters, and other types of emergencies more effectively by getting in touch with us today. Call us at 888.819.0041 or  fill out our contact form  for more information.

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critical risks and contingencies business plan

Business Plan 101: Critical Risks and Problems

critical risks and contingencies business plan

When starting a business, it is understood that there are risks and problems associated with development. The business plan should contain some assumptions about these factors. If your investors discover some unstated negative factors associated with your company or its product, then this can cause some serious questions about the credibility of your company and question the monetary investment. If you are up front about identifying and discussing the risks that the company is undertaking, then this demonstrates the experience and skill of the management team and increase the credibility that you have with your investors.  It is never a good idea to try to hide any information that you have in terms of risks and problems.

Identifying the problems and risks that must be dealt with during the development and growth of the company is expected in the business plan. These risks may include any risk related to the industry, risk related to the company, and risk related to its employees. The company should also take into consideration the market appeal of the company, the timing of the product or development, and how the financing of the initial operations is going to occur. Some things that you may want to discuss in your plan includes: how cutting costs can affect you, any unfavorable industry trends, sales projections that do not meet the target, costs exceeding estimates, and other potential risks and problems.  The list should be tailored to your company and product. It is a good idea to include an idea of how you will react to these problems so your investors see that you have a plan.

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critical risks and contingencies business plan

A Guide to Crisis Management and Contingency Planning

critical risks and contingencies business plan

COVID‐19 is an economic crisis in addition to a humanitarian one. As the humanitarian and economic impact of COVID‐19 ripples through the world, companies must develop a framework to identify, anticipate, and mitigate the disruption that their everyday activities will face. Companies have an obligation to support and ensure the best outcome for their stakeholders which include employees, customers, shareholders, and others.

Below (Figure 1) is FTI’s view of the immediacy of how COVID-19 will affect certain industries. The closer to the center of the circle, the greater the impact. In FTI’s opinion, very few industry verticals will remain immune.

Figure 1: The Ripple Effect of COVID-19

The ripple effect of COVID-19.

Click to enlarge.

The severity and speed at which COVID-19 has impacted the economy, is unprecedented. We all are trying to understand what it means to the short- and long-term prospects of businesses, industries, and the greater economy. FTI has seen the ups and downs of various print industries in the past decade (directories, newspapers, magazines, etc.). Many print businesses are working on thin margins due to secular declines in their business. A delay or loss in revenue will have a detrimental effect on the ability of the business to pay its employees and keep the doors open.

As a sobering reminder, printing (the general industry) fell 10% (2007-09 CAGR) during the last recession and did not recover to pre-2008 levels. The industry bottomed out at (18.7%) YoY decline in 1Q09.

Figure 2: Commercial Printing Shipments, Year-Over-Year Change by Quarter

FTI commercial printing shipments year-over-year change by quarter.

Figure 3: Commercial Printing Shipments, Millions of Dollars, Quarterly, Seasonally Adjusted

commercial printing shipments in millions of dollars

Further, peak unemployment claims have already exceeded any one peak month during the great recession. In real time, feedback from clients suggests that advertising dollars are down anywhere from 20% to 50%. There will be a trickle-down effect for those who print content, marketing, and advertising materials.

In these unprecedented times, businesses require decisive actions that balance the need for preservation with the needs of your employees and stakeholders. Below is a list of considerations as you embark on this unexpected journey:

Figure 4: COVID-19 Response Matrix

FTI COVID-19 Response Matrix

Put health and safety first, always. While continuity is important, it must be clear that the company will not take unnecessary risks to keep doors open or protect the bottom line. Establish clear accountability and continue to emphasize the commitment.

Build a reputation for transparency with timely information about the current state. Jumping straight to policy updates or other next steps leaves recipients to speculate about what prompted the communications — and in this environment, they’ll jump to the worst-case scenario. Confirm where you are before explaining where you’re going.

Ensure decisions are properly vetted before they are communicated. Well-intentioned efforts to get information to stakeholders quickly can inadvertently miss key implications or interdependencies, creating problems down the road. Create a coordinated working group, including health and safety, HR, operations, commercial leadership, supply chain, legal, finance, and communications.

Be specific about the actions the company is taking — but keep it in the present tense. Whether you’re announcing enhanced hygiene practices, contingency plans or the impacts of a location shut down, you will not earn stakeholders’ trust with vague generalities. You will not keep it without acknowledging that policies will necessarily evolve along with the situation.

Leave facts and guidance to the experts. Information is evolving quickly and, unfortunately, there will be litigation as people second-guess the decisions being made today with the benefit of hindsight. Point people to the CDC and WHO websites for the latest updates about how the virus is spreading and how people in different parts of the world should respond. Avoid interpretation.

Underscore that efforts are part of an ongoing commitment. Acknowledge existing policies and practices as you announce enhancements. As appropriate, point to the prior experiences that helped to test and refine your approach.

Rapid Financial Assessment and Contingency Plan

In a situation such as this, liquidity can quickly become a major concern. Maintaining liquidity and adequate reserves means the business can be flexible in its response to the various surprises that are likely to continue in the short-term. Many businesses are experiencing downside shocks to revenue that have never been seen before. Further, some of your customers will be unable/unwilling to pay due to their own cash preservations efforts. To determine your cash flow risk, FTI Consulting suggests the following actions are undertaken.

  • Scenario and Contingency Planning: Update business plans and forecast, determine key business risks, and assess operational readiness, run sensitivity analysis for downside scenarios, generate options planning, stress test key business drivers, monitor and determine "one time" and long-term impact of COVID-19. Review the health of your customers.
  • Strategic Communications: Maintain ongoing dialog with all key stakeholders, put health and safety first, build a reputation for transparency, vet decisions before communicating, be specific about company actions, communicate in present tense, defer health facts and guidance to experts, and articulate ongoing commitment.
  • Supply Chain: Monitor key Tier 1 supplier risk and map geographic impact, develop a plan for dual-sourcing or alternate supply, identify Tier 2 and Tier 3 suppliers that Tier 1 suppliers utilize for critical items, review and assess the impact of potential supply delays, integrate an updated business plan, and create a supply forecast.
  • Cash Flow and Covenants: Prepare rolling 13-week cash flow forecast to activity, manage liquidity forecast and actuals, stress test for downside risk, document and test covenant thresholds, engage in critical lender communications, and manage working capital through the liquidity cycle.
  • Cost Management: Assess cost structure for Variable and Fixed Costs, reduce discretionary expenses to maximize cash position as the situation stabilizes, identify core business units and assess business unit profitability, rationalize key vendors and contracts in alignment with supply chain strategy.
  • People: Review disaster recovery plans and ensure capabilities for remote work support, assess health insurance coverage and, if applicable, the ability to self-fund insurance, perform capabilities evaluation for alternate staff to cover key roles, and assess the need for interim resourcing and expertise.

Stay tuned for more detailed cash flow management strategies.

  • Categories:
  • Business Management - Operations
  • Business Management - Productivity/Process Improvement

Timothy Thompson is a Managing Director in the Publishing + Digital Media practice of FTI Consulting. Thompson has more than 15 years of consulting, project management, and mergers and acquisition (“M&A”) advisory experience focusing on post-merger integration and change management in a variety of industries, including publishing, manufacturing, logistics and distribution, engineering and construction services, and telecommunications.

critical risks and contingencies business plan

Contingency Plan: The What And The Why

Contingency Plan: The What And The Why

Risk management is a topic that never gets old. In business, managing risks properly allows companies to minimize the downtime and expenses associated with negative events that sometimes occur and ensure uninterrupted business operations.

critical risks and contingencies business plan

Download PDF

What exactly is the contingency plan?

A contingency plan is an emergency plan or plan B.

It is used when something goes wrong and immediate action is required to minimize the damage. The plan is focused on events that may or may not happen, but if they do – some form of disruption will occur to the business processes.

Why does everyone need a contingency plan?

No one is immune to disasters, malicious behavior, or bad luck.

In project management or company management in general, and even in our personal lives, accidents and emergencies are almost inevitable. Whether we like it or not, something is bound to go wrong at some point.

Here are some of the examples of risks that a business contingency plan can target:

  • Hackers steal and/or delete your business data.
  • Key staff members leave the company abruptly taking the knowledge with them.
  • Natural disasters destroy your office space/production site.

The cost of mistakes is very high these days. Clients are ready to walk away at any time, and competition is ruthless. Every disaster that the business goes through can be its last one.

Digital solution to support your contingency plan

There are many ways you can build and enhance your contingency plan that we will discuss later in this article.

One of the great ways to combat many business risks or mitigate them at least is through digitizing your workflow. For example with online group task tracker . Keep your project details, meeting notes, product backlog, and everything else online. Then you won’t be tied to a specific location, and everyone on the team will have access to everything 24/7.

Bordio is a powerful weekly planner with built-in project management tools that are easy and fun to use. In addition the ease of use will help to introduce this modern schedule planner quickly.

Bordio calendar board and waiting list section

In addition to storing all your data securely online and ensuring continuous business flow, Bordio offers:

  • Online calendar planner with events and tasks all in one place.
  • The waiting list task planners for all unscheduled tasks, dreams, and some-day ideas.
  • Project planning tools for self-check to ensure you don’t burn out.

How to create a good contingency plan?

The beauty of the contingency planning process is that it can look any way you like. Still, there are steps that you can take in order to ensure that the plan that you’ve prepared is a good one.

9 steps to a contingency plan

#1 Create a list of key business processes

Before you can plan out your strategy for emergencies, it is important to outline everything that is essential (=critical) to the company’s operations.

Really take your time with this step and ask your team to help out. The less you miss in step one, the more prepared and secure you will end up with the contingency plan.

Use the following questions to help with brainstorming:

  • What roles are critical for business?
  • Do key employees hold unique knowledge that is not documented somewhere else?
  • What processes are mission-critical and ensure normal operations?
  • Who’s/what absence would cause disruption and delays?
  • What departments/processes require the most resources to build and maintain?
  • What resources does the company rely on to continue its operations?

There are many more questions you can ask yourself, but these five should already put you in the right direction.

#2 Think of all risks that can occur with these processes

Just like with step one, don’t rush through the risk identification stage and engage your colleagues if you work with a team. We also recommend using software – working as a team will be much easier if you use convenient remote collaboration software .

The goal here is to identify key risks and write down as many of them as possible. Not to have an anxiety attack but to use this list as a base for further contingency planning.

Tip: Once you’re done with the list in your task organizing app , sit on it for a couple of days. Get back to the list with a fresh mind, go through it and see if you get any new ideas that you didn’t think of before.

If you get stuck, use the “What if” question to get creative again. It is a simple tactic for brainstorming that helps come up with the most unexpected, yet possible risks.

#3 Evaluate the risks you’ve identified

Once you know your risks, it’s time to do deep work with them and conduct business impact analysis (a.k.a. risk assessment).

With risks, your key focus should be on understanding their:

  • Probability

There is just the right tool for that – the Impact Probability Matrix, which helps visualize and identify how likely those risks are to occur and what their potential impact is on business.

Impact Probability Matrix

There are many ways you can classify your risks with this matrix, but we recommend keeping it simple and sticking to the three main categories: high, medium, and low.

Why is this step necessary?

No matter how good your time management skills are, there are rarely enough hours in the day to accomplish everything on our online to-do list or schedule weekly planner . And it is vital that the most critical stuff gets done.

As you look at your list of risks with their severity and likelihood identified, you will be able to prioritize your tasks and work on the most pressing threats first. The 80/20 rule applies to risks too – 20% of risks are responsible for 80% of trouble. Sort those risks out first, and you will already be in a far better position.

#4 Calculating the cost of potential risks

As you work on classifying risks, consider calculating potential costs too. For example, if your online services go down, how much would each hour of downtime cost you? Having numbers in front of you will be extremely helpful when you’ll be thinking through a disaster recovery plan and avoidance scenarios. And if you need to request a budget for those measures, showing real financial damage will help you get approvals much easier. After all, experiencing an emergency is bad, but having no cash to deal with it is even worse.

#5 Working on mitigating the risks

Some risks can be mitigated and avoided completely, others to a certain degree. But to achieve any of that, you need to be proactive about mitigation.

Let’s take the online service as an example. Users log into the web interface to access certain functionality, such as personal finance tools. One of the risks that such a service might experience is hacker attacks and data leaks. Both are horrible risks that can be detrimental to the survival of the service.

So, to mitigate the data leak and hacking issues, for example, you can implement a 2-factor identification and a certain complexity requirement for user passwords. Also, don’t forget about the security of your online weekly schedule maker . Your team in the backend can simultaneously work on strengthening the existing code and implementing more vigorous bug tests to reduce the probability of the solution being hacked.

An alternative example is creating backups of all your critical data and storing it offsite. So, if something happens to your primary server with all data on it, you’ll be able to access and restore the company’s information quicker (or even instantly, depending on the strategy you implement), reducing potential downtime and losses. Some risks can be thought of in advance, such as delegating important tasks first – such as marketing tasks – so that you don’t fill up your work list. This is where startup digital marketing agencies can help you if you are just starting out and b2b saas marketing agencies if you have an established company.

Pro tip: Some risks are very hard to mitigate, and if their probability is very low, then you might consider the cost of ignoring the risk versus the cost of mitigating it. If you choose to leave the risk unattended, remember to factor in the reputational loss in addition to the financial.

For those risks that cannot be mitigated completely, still look for ways to reduce their probability or impact.

#6 Creating an action plan for potential risks

Now that we know all the risks that are out there and have worked on mitigating some of them, it’s time for the most exciting part – drawing up an action plan for top-priority risks.

At this point, we focus on reactive measures –

  • What do we do when something bad happens?
  • Who has to be notified about the incident/issue?
  • Who is responsible for overseeing the contingency plan in action?

For example, if there is a data breach, we have to assign specialists to identify and remove the issue while communicating to our clients, partners, and employees openly about the situation and what we’re doing to resolve it. All management needs to be notified, and the Head of IT is responsible for normalizing the situation.

Or, if you experience rapid growth of customer requests and your support team can’t handle it, we reach out to on-call staff to assist with the avalanche of work. HR needs to be notified to onboard temporary staff and the head of the support team is ultimately responsible for sorting out the problem.

It is also recommended to create a timeline and agree on acceptable issue resolution timeframes and have a communication plan in place too so everyone in the company knows what to do in case of an emergency.

Tip: If you’re short on time, deal with high impact high probability risks first and schedule the rest of the work for later. To make sure you finish the contingency plan for each and every risk, schedule time blocks in Bordio over the next few weeks. Time blocks will ensure you don’t get overbooked and will have the capacity to finalize this important task.

Time block examples Bordio board view

#7 Get approvals for contingency plan from department managers

Ideally, you should be working with managers throughout the entire process of creating the contingency plan, so they should be well aware of what’s in it.

Still, make sure you get formal approvals from everyone before the plan is shared further. Everyone needs to understand and accept the plan. When the disaster happens, there will be no time for discussions or misunderstandings.

#8 Communicate the details of the contingency plan with the team

Make sure that your team is in the know.

Share that you have a contingency plan, why it’s there and how it’s beneficial to everyone. Let respective departments know about the potential risks you’ve identified for their workflow and how such risks will be addressed. Keep all information about the contingency plan and key steps somewhere everyone can see them, for example in a shared Bordio note.

#9 Contingency plan maintenance

Once your contingency plan is implemented and rolled out, you’ll need to update it regularly to ensure it remains relevant. Things change, and they change fast. New processes are introduced in companies all the time, making your current contingency plan obsolete.

Make sure you not only create contingency plans but review them at least once a quarter or every time your risk management strategy is updated. If you follow Scrum methodology , for example, you can run such contingency plan check-ups during Sprint Review meetings. Also, conduct a contingency plan review each time a major change is introduced in the company’s workflow.

That way, you will truly protect yourself against the unknown and keep the business secure.

Contingency plan risks to watch out for

There are key risks associated with contingency planning that can jeopardize the entire initiative. It’s good to be aware of them to be able to prevent them.

Key risks of contingency plans

Risk 1: The initiative is not supported

Often stakeholders agree to something reluctantly but don’t support it fully. With business contingency plans, it’s a matter of business survival, so it’s critical to ensure honest buy-in from all key stakeholders.

Risk 2: Outdated contingency plans

We’ve talked about it already, but it’s a very common risk, so it’s worth repeating it. Contingency plans are not meant to be done and forgotten about. It is a lot of work to draw up such a plan, so there is a lot of temptation to just leave it once it’s finished. However, an outdated business contingency plan is worse than a non-existing one, because you can make the matter so much worse with an inadequate emergency response.

Risk 3: Refusal to think about plan B

It’s human nature to not want to think about negative things. That’s why so many people ignore insurance policies, never make a will, and skip data backups. Same with companies, employees and managers might not want to think about unexpected events or the possibility of something going wrong. It’s vital to build a trusted relationship with them and explain how such superstitions can damage the company’s future.

Final thoughts on the contingency planning process

The best scenario for a contingency plan is to never be used and it’ll just be there somewhere ready to go in the virtual planner app . Yet, if something bad does happen, the second best thing is to have a relevant, detailed, and well-thought-out plan that will save the day when the disaster strikes.

If you’d like to be better prepared for what the fast-paced work environment of today brings us, check out our guides on Agile , critical path method , and fast-tracking in project management.

critical risks and contingencies business plan

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Susan Klein

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critical risks and contingencies business plan

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Go to homepage business.govt.nz business.govt.nz

Business.govt.nz, in association with, continuity and contingency planning.

Continuity and contingency planning is about being prepared for all types of disruptions, for example, an earthquake, broken equipment or losing a supplier — and quickly getting back on your feet.

Use this step-by-step guide to get your plan sorted. It’s vital to your business’s survival.

Business Continuity Planning = Plan B

A business continuity plan (BCP) pinpoints the most important parts of your business, identifies potential risks to these critical pieces and prepares you to recover as quick and easy as possible. Contingency planning is a crucial part of continuity planning — it means having a backup if your original plan no longer works. It’s your plan B.

Your BCP shouldn’t be limited to what to do after a natural disaster. It should cover any risks or threats that could disrupt your most important business activities.

A continuity plan is different from emergency planning.

Emergency plans cover in-the-moment procedures in a crisis, for example, a natural disaster. BCP covers how you’ll get core parts of your business up and running again.

Emergency planning

Why you need to plan

Business owners aren’t legally required to do business continuity planning (BCP) but there are many reasons to put time and energy into it. Many small businesses struggle to reopen after a disaster. Planning greatly improves the likelihood that your business will survive — so it should be on your must-do list.

Other reasons to do BCP:

  • It’s a plus for potential buyers and investors — it shows you’ve thought about other scenarios than simply business-as-usual. It gives your staff confidence, especially if you get them involved in planning.
  • It helps you spot good opportunities for your business now, for example, outsourcing payroll.
  • It could help you negotiate lower insurance premiums — the more resilient you are, the more likely insurers will consider you a lower risk.

Don’t let your plans gather dust on the shelf.

Step-by-step guide to business continuity planning.

This guide will get you thinking about how to protect the most important aspects of your business.

As you go through each step, consider:

  • your particular risks if something goes wrong
  • how you might get back to business-as-usual as quickly and smoothly as possible
  • what the options are if you can’t get back to business as usual.

It’s important to think of different options rather than absolutes.

Step 1. Identify key products or services

Questions to ask:

  • What are the biggest risks to your most profitable activity? How can you reduce these risks? 
  • What is essential to produce or carry out these key activities, for example, raw materials, a fully functioning website?
  • Can you get by without your full suite of products or services? 
  • What is your least profitable activity? Be prepared to pause or stop this until you get back on your feet.

Step 2. Identify key internal people

These might be staff or business partners — or your board, if you have one.

  • If you have staff, could your business continue without some or all of them on deck? 
  • Does your business rely heavily on one person for key tasks? What happens if this person is unavailable? What are the main duties of all staff? 
  • How might you get temporary staff at short notice?
  • How can you support staff and their families if they are affected?

Casual workers at short notice

Dahlia runs a café and both her servers are off with the flu. But she has a plan in a place for this situation — Student Job Search. She already has a job ad written up and on file, plus job search login details and instructions on how to post an ad.

She gets the ad up first thing in the morning. Temporary servers are in their aprons by the lunch rush.

Just like the rest of her employees, these casual workers need an employment agreement.

Dahlia uses business.govt.nz's online Employment Agreement Builder to quickly put together simple and legally safe agreements. She keeps these on file for next time she needs to call on these workers, or hire new casual employees.

Type of employment agreement: Casual employee (external link)  — Employment Agreement Builder

Step 3. Identify key connections

These might be suppliers, service providers, clients or regular customers.

  • How robust is your supply chain?
  • If your business relies on external suppliers or manufacturers, do you have a backup if something goes wrong? 
  • If your business uses transport to deliver products or services, what are your alternatives if something goes wrong? Can you rent vehicles? What if the port, airport, road or rail system is disrupted? Could customers come to you in the short term?
  • Who might help you get back on your feet? Do you have good relationships with your bank, landlord or advisors?
  • Who can help if you can’t get into your premises or IT systems?

Step 4. Identify essential equipment and supplies

  • If you rely on your own equipment to make products, could you borrow or rent alternative equipment or premises if yours are out of action?
  • Could your staff use their home computers for work if business computers are unavailable? Find out who has suitable devices — the business can help pay for internet use.

Step 5. Consider relocation options

  • If you need to vacate your usual premises unexpectedly, how can you keep your business ticking along?
  • Could staff work from an alternative site, or from home, if your premises can’t be used? You may want to ask your main suppliers, customers — even competitors — if they could spare room in their premises in an emergency.
  • If you need to move, how can you best communicate with your customers about your new location — and from your new location?

Leasing or buying premises

Making the best of it

After the Christchurch earthquake, two panel-beating businesses could no longer work from their premises. They both had access to a temporary workspace, but it wasn’t big enough for all their workers.

Partnering up was an obvious solution — the owners had already been thinking about sharing a space due to rent rises.

They decided to offer a 24-hour service, with staff working in shifts around the clock in the temporary workspace.

This short-term solution — which drew on their contingency planning in case of rent rises — meant they could keep revenue coming in after the emergency.

Step 6. Consider insurance options

  • What could go wrong with my business or at work?
  • Have I got it covered? 
  • Is business interruption insurance, which covers against losses after an emergency, a good option?

Cover your assets (external link) — Resilient Organisations

Step 7. Identify who can run the business in your absence

  • If something takes you or another important team member away from the business, who can take over important tasks? 
  • If there’s a major disruption, what is each staff member’s role in getting the business back on its feet?

Step 8. Keep contact details handy

  • Do you have emergency contact details handy? This list may include staff, emergency services, clients and suppliers. You may also include your insurance details, security company and neighbouring businesses.
  • When were contact details last updated — is it time to check for any changes?

Step 9. Back up important data

  • What data — customer details, emails, files and spreadsheets — are critical to your business? 
  • What sensitive data — personnel files, bank details, tax documents — do you need to keep safe? 
  • Do you regularly back up data on a hard drive, server or in the cloud? It’s time to start if you don’t do this already.

Storing and backing up data

Step 10. Put it into practice

Much like emergency plans, a business continuity plan shouldn’t sit on the shelf. It needs to be tried and tested with relevant staff at least once a year. This doesn’t need to be expensive or time-consuming.

Run 20-minute stress test exercises where you give staff a scenario to plan for. Rather than fixating on the cause of the disruption, e.g. a natural disaster or power cut, focus on how to manage the consequences:

  • What will they do if an important machine isn’t working? 
  • What options do they have if the premises are closed for a week or longer?

No two crises are the same. But together, you may find similar solutions to different situations. Your plan will change as your business evolves, so make sure you debrief after each test and update the plan if necessary.

Staff need to know what to do even if you’re not available. Make sure your plan is easily accessible.

For a downloadable guide and template that walks you through important steps of BCP, see Wellington Emergency Management Office’s website Get Prepared.

Prepare your business (external link) — Get Ready

Resilient Organisations has resources to help small businesses thrive in any environment.

Guides for businesses (external link) — Resilient Organisations

Earthquake preparedness checklist [PDF, 356 KB]  — Resilient Organisations

Do talk to your bank manager about how to manage cash flow through a disaster.

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6 Critical Risks in a Business Plan

Business plan risks analysis, problem, challenging factors and mitigation strategies.

What is a major example of critical risk in a business plan? Every business is prone to facing certain business risks, which might appear very critical in the real world.

As a business person, you must be able to spend sufficient time in drafting your business plan so that it is capable of addressing the critical risks and assumptions that your business might face.

You should be able to envision and determine, in your business plan, critical risks in a restaurant business plan that might pose a threat to the overall success of your business. When you do not pay enough attention to these risks, it could cause your readers – most important of which are potential investors and bankers – to negatively evaluate your business plan.

Below are some critical business risks and contingencies in a business plan that you must ensure to properly handle before they pose a threat to the success of your business.

Conducting Business Plan Risk Assessment – Business Plan Risk Factors

• Risk of Overestimated Figures

The number one critical business risk that might land your business into problem by getting too much negative attention has to do with figures that have been overestimated. We are talking about high sales profit that seem too optimistic; salaries that appear to be too high or outrageous for a business of its age; and profitability.  These three, if you overestimate the figures, will inadvertently pose as a serious business risk.

For salaries, it will be wise for you to go for the minimum as a startup business, together with any additional incomes that come in the form of profits.

For sales and profits, it will be wise of you to always give figures that appear to be more likely, not figures that seem to match your optimism. Your business’ profitability largely depends on your ability to meet sales projections, and your ability to be able to operate in the confines of your costs. • Risk of Indecisive Conversion Rates

Conversion rate (also hit rate) has to do with the percentage of people, out of the total number of people you approached, that purchased or patronized your product or services. Conversion rate could be best tested through test marketing or pre-selling.

When you test market, it simply means you offer the sales of your product within a particular limited area, for a particular period of time. Usually, you would offer incentives to buyers to encourage them help you outline your actual target customers for your business.

When you pre-sell, you are making introduction of your products or services to prospective customers, and even accepting orders for deliveries.

Your goal is to accurately know the conversion rate such that a reader may be able to take your projected market size, apply the conversion rate, and be able to deduce what the total sales estimate might be. • Risk of Ignored Competition

Here is another critical business risk that many entrepreneurs fail to curtail. As an entrepreneur, you are the master and captain of your game. You are to take charge and seize your market. How do you do that? You are to know every competitor in the industry of your business. Yes, it is an obligation you can never overlook.

Many entrepreneurs feel they know their competitors very well, when in actually reality, they have no real clue as to who their major competitors are. You must ensure you have adequate knowledge of your immediate competitors, as well as substitutes and potential or latent competitors.

If you want to prove your long-term vision for your business, you must always keep abreast with the latest development regarding your competitors. You should even envision businesses that, in later years, might stand as competitors.

• Financial Risk

Most businesses today fold up as a result of financial difficulties. Lack of adequate financial resources is a very critical business risk that might make a business to close.

In most cases, the business runs out of enough money; many customers are taking too long to pay up; unforeseen expenses and too much miscellaneous; accidents and costly financial mistakes could pose a very critical business risk to the business, and even lead to the eventual folding up if the business does not have enough money saved for rainy days to handle such problems.

In your business plan, you should demonstrate that you have adequate financial strength to operate your business until break-even and even after that. Provide the amount of needed investments and loans you will obtain to start and even run the business successfully – even if you are sure your sales volume will generate as much needed money to run the business.

• Risk of Inadequate Payback

When drafting your business plan, it is pertinent to always think about what the readers of your business plan will be expecting. For most people, it is how you intend to pay back the loan or investment you obtained, or the line of credit you hope to obtain from external sources such as banks.

For bankers, they would analyze the business plan critically to understand how exactly you have made plans to settle up the loans or line of credit you want to obtain from the bank. Your cash flows and your collateral issues are highly significant.

In the case of investors, the growth rates and profit margins of the business are highly critical because these are the factors that will actually determine how much they would earn.

For very vital employees, analyzing the business plan helps them have a good grasp of the business’ operation; this in turn would help them envision their future with the business. • Strategic Risk

Another critical business risk factor to your business plan is the strategic risk. Sometimes, your best well-laid business plan might very quickly, actually look so obsolete.

The strategic risk is the business risk that your business strategy might actually become too rigid and no longer efficient in shooting your business to its desired level; your business then starts struggling in order to achieve its business goals.

This business risk could be as a result of a very powerful new competitor in the industry; technological advancement; a shift in the demand of customers; or even a rise in the cost of raw materials or other market changes.

You should take out time to write your business plan such that whenever you face a strategic risk, you should be able to easily tweak your business strategy and adapt, and be able to come up with a viable solution.

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critical risks and contingencies business plan

12.10 Contingency Planning and Risk

Suppose you are developing a green or environmentally friendly product line that is particularly attractive because of a government tax credit. What if the government rolls back the tax credit? Or what would happen if a key member of the management team leaves the company? What if interest rates sky rocket? What if a key employee deletes the design specifications of a new product? What if a disgruntled employee destroys the social networking application and backup files? It is impossible to have a fall-back plan for every situation. But if there are key people and key assumptions that will determine business success, then a contingency plan is essential.

Risk The probability that some adverse event will happen that will have a negative impact on the start-up’s ability to survive. is the probability that some adverse event will happen that will have a negative impact on the start-up’s ability to survive. Risk management An attempt to identify adverse events within a company and in the external organizational environment, and in turn develop strategies to deal with the consequences. is an attempt to identify the adverse events within a company and in the external organizational environment, and in turn develop strategies to deal with the consequences. Many of the internal risks to the start-up are related to the critical assumptions involving the tenure of the management team, the ability to attract key personnel, the ability to set up key organizational systems such as operations and marketing, the ability to manage cash flows, and the ability to adapt untested technologies. There are also external industry-related risks related to the ability to forecast market growth, and the risks related to unforeseen competitors and unforeseen emerging technologies that might affect profitability. There are also external risks related to economic downturns, interest rates, government intervention, political movements, and even changes related to social norms. Risk assessment also has to be made in terms of the impact of adverse weather conditions, earthquakes, and other natural disasters.

As noted earlier, there is some danger in pointing out weaknesses and threats, but they need to be addressed in a surreptitious manner. This can be accomplished by presenting alternative scenarios and focusing on the probability of their occurrence. Contingency planning and risk assessment should be addressed in the business plan or at least informally documented and communicated among the founders of the business and key management employees.

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  1. What is a contingency plan? A guide to contingency planning

    January 16th, 2024 10 min read Jump to section Summary A business contingency plan is a backup strategy for your team or organization. It lays out how you'll respond if unforeseen events knock your plans off track—like how you'll pivot if you lose a key client, or what you'll do if your software service goes down for more than three hours.

  2. Contingency plan examples: A step-by-step guide to help your business

    1. Make a list of risks and prioritize them according to likelihood and severity. In the first stage of the contingency planning process, stakeholders brainstorm a list of potential risks the company faces and conduct risk analysis on each one.

  3. What Is A Contingency Plan & How Do You Create One?

    A contingency plan is a "plan B" that helps a business address specific situations or incidents that may or may not be out of its control. A contingency plan is the way that your team...

  4. What Is a Business Contingency Plan and How to Create One

    A business contingency plan identifies potential risks to your business and outlines the steps or course of action your management team and employees would need to take to combat them. Risks can include a global pandemic, natural disaster, loss of a key employee, supply chain breakdown, a new competitor, and more.

  5. What is a Business Contingency Plan

    1. What is a Business Contingency Plan? 1.1. Benefits of a Contingency Plan 2. How to Make a Contingency Plan 2.1. Step 1: List down the key risks 2.2. Step 2: Prioritize the Risks Based on Their Impact 2.3. Step 3: Create Contingency Plans for Each Event 2.4. Step 4: Share and Maintain the Plan 3. What's Your Take on Contingency Plans?

  6. What Is Contingency Planning? Creating a Contingency Plan

    A business contingency plan is an action plan that is used to respond to future events that might or might not affect a company in the future. In most cases, a contingency plan is devised to respond to a negative event that can tarnish a company's reputation or even its business continuity. However, there are positive contingency plans, such ...

  7. An Overview of Business Contingency Plans

    1. Identify the risks Before you can prepare for a disaster, you need to understand what types of disasters you're preparing for. Think about all the possible risks to your organization, including natural disasters, sudden changes to revenue or personnel, or security threats.

  8. What Is a Business Contingency Plan?

    A contingency plan identifies potential risks to your business and outlines steps your management team and employees can take if confronted with one of those risks. It helps protect the health and safety of your workers after an event has occurred, while also minimizing business interruptions that can result in financial losses.

  9. Contingency Planning

    Contingency planning is one response to risk. But in some cases, it may be safer or more cost-effective to tackle it in other ways: to avoid the risk, by investing in new equipment, for example; or to share the risk, by purchasing an insurance policy. Or you may choose not to formally plan for some lower-priority risks at all, but to manage ...

  10. What Is A Business Contingency Plan & How To Create One

    To create a contingency plan for your organization, follow this five-step framework: 1. Identify/prioritize your resources. First, do a little research throughout your organization to identify and prioritize the resources that your organization cannot do without, such as employees, IT systems, and specific facilities and physical assets. 2.

  11. Contingency Plan Basics: Vital Steps for Contingency Planning

    A solid contingency plan can be developed for standard system disruptions or worst-case scenarios. For most businesses, a good plan can mean the difference between success and failure, so it's important to always have one in place. Read on to learn the importance of contingency planning.

  12. Contingency planning: 4 steps to prepare for the unexpected

    Contingency planning helps business respond to unexpected events. Use this guide to create a contingency plan for your organization. ... Because your clients and customers are relying on you to deliver as promised, it's critical that you have a backup plan in place. ... Contingency planning is a part of a business' risk management strategy ...

  13. Contingency Planning Essentials

    By Joe Weller | May 9, 2023 Successful organizations must understand potential risks and have contingency plans in place to address them. We've assembled expert tips on effective contingency planning and offer practical insights on how to test those contingency plans.

  14. What Are Contingencies and Contingency Plans? Definition and Examples

    A contingency is a potentially negative event that may occur in the future, such as an economic recession, natural disaster, or fraudulent activity. Companies and investors plan for various...

  15. 5 Steps to Create a Contingency Plan for Your Business

    A business contingency plan is an established strategy or backup plan designed to help organizations respond to possible future events. This contingency planning process encourages you to consider business and financial strategies for potential risks well in advance.

  16. What is contingency planning?

    The contingency planning process begins with a risk assessment to gauge the potential impact of each risk. Typically, risk analysis is conducted by business leaders and employees. Team members begin with a brainstorming session where they discuss potential risks, courses of action and the company's overall preparedness.

  17. Risk Assessment and Contingency Planning

    The essential steps to creating a contingency plan for risk management involve pinpointing what risks are most likely to disrupt your company — otherwise known as the risk assessment. Then, you must define how severe of an impact each of these risks will have and sort them into appropriate categories.

  18. Business Plan 101: Critical Risks and Problems

    Some things that you may want to discuss in your plan includes: how cutting costs can affect you, any unfavorable industry trends, sales projections that do not meet the target, costs exceeding estimates, and other potential risks and problems. The list should be tailored to your company and product.

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    Scenario and Contingency Planning: Update business plans and forecast, determine key business risks, and assess operational readiness, run sensitivity analysis for downside scenarios, generate ...

  20. Contingency Plan: The What And The Why

    Also, conduct a contingency plan review each time a major change is introduced in the company's workflow. That way, you will truly protect yourself against the unknown and keep the business secure. Contingency plan risks to watch out for. There are key risks associated with contingency planning that can jeopardize the entire initiative.

  21. Continuity and contingency planning

    A business continuity plan (BCP) pinpoints the most important parts of your business, identifies potential risks to these critical pieces and prepares you to recover as quick and easy as possible. Contingency planning is a crucial part of continuity planning — it means having a backup if your original plan no longer works. It's your plan B.

  22. 6 Critical Risks In A Business Plan

    Below are some critical business risks and contingencies in a business plan that you must ensure to properly handle before they pose a threat to the success of your business. Contents Conducting Business Plan Risk Assessment - Business Plan Risk Factors • Risk of Overestimated Figures

  23. Contingency Planning and Risk

    12.10 Contingency Planning and Risk. ... But if there are key people and key assumptions that will determine business success, then a contingency plan is essential. ... Many of the internal risks to the start-up are related to the critical assumptions involving the tenure of the management team, the ability to attract key personnel, the ability ...