What is a Contingency Plan and How to Create One

Most successful people are those who are good at Plan B. —James A. Yorke

Unexpected challenges are a part of running any business. Your main supplier could suddenly shut down, key team members might leave at the worst possible time, or a product launch might flop. These situations are undeniably stressful, but with the right preparation, they don’t have to catch you off guard.

Even the COVID-19 pandemic serves as a stark reminder of the risks of being unprepared. Supply chains collapsed, operations ground to a halt, and economies around the world faltered. The damage was staggering—over 20 million jobs were lost in a matter of weeks.

Events like these can shake up your business, but your best defense against such disruptions is proactive preparation. That’s where a contingency plan comes in. It’s your roadmap for navigating the unexpected and ensuring you can respond effectively when challenges arise.

What is a contingency plan?

A contingency plan (CP) is a predetermined course of action designed to help an organization respond effectively to a possible future event or circumstance. It’s essentially a “Plan B” that outlines specific steps to take when something unexpected occurs.

These contingencies may get triggered due to multiple reasons, such as:

• Natural disasters
• Market crashes
• Economic downturns
• Credit problems
• Funding loss
• Supply chain disruptions
• Employee strikes
• Civil or political unrest
• Cyberattack

Understanding different contingency events

The likelihood of contingency events can be categorized into two main types: predictable “White Swan” events and less predictable “Grey Swan” events.

This distinction helps you prioritize your planning and allocate resources more effectively.

White Swan Events

White Swan events are relatively predictable disruptions with historical precedents and clear patterns. Examples include:

• Regular market fluctuations like seasonal changes in demand or pricing trends.
• Seasonal supply chain disruptions: For example, delays during peak holiday seasons.
• Planned employee strikes based on known labor agreements or contracts.
• Common technological issues, such as system upgrades or software bugs.

You can typically prepare for these events using standard risk management practices and historical data analysis. Their probability and potential impact can be estimated with reasonable accuracy, which makes it easier for you to develop specific response strategies.

For instance, at DesignRush, we often face delays and slowdowns from agencies during peak holiday seasons due to higher demand or staffing shortages.

To manage this, we’ve developed a contingency plan that adjusts our strategies and communication, ensuring smooth connections between businesses and agencies.

Grey Swan Events

Grey Swan events are less predictable but still conceivable disruptions that fall somewhere between regular occurrences and completely unexpected events. These might include:

• Severe economic downturns: Like a global recession.
• Major cyberattacks: Attacks targeting your systems or data breaches.
• Regional political instability: Resulting in sudden changes to regulations or trade restrictions.

While you can anticipate these types of events, their timing, severity, and exact nature are harder to predict. For these, you need more flexible and adaptive contingency plans that can be adjusted based on the specific situation.

“With mortgage rates steadily rising, we understand that our clients’ financial strategies may need to adjust. That’s why we’ve developed a contingency plan to respond if rates continue to climb. This flexibility helps our clients navigate challenges and keeps our business afloat.”

–Aneta Poplavska, Marketing Manager, The HMO Mortgage Broker

Understanding the difference between White and Grey Swan events is key for risk assessment and resource allocation.

You’ll need to maintain solid plans for both types, but White Swan events often require specific, detailed procedures. In contrast, Grey Swan events need broader, adaptable frameworks that can evolve as situations unfold.

It’s also worth noting that what might be considered a White Swan event for one business could be a Grey Swan event for another. This depends on factors like your industry, location, and experience.

Key elements of a contingency plan

A well-crafted contingency plan provides a strategic approach to managing unexpected disruptions in business operations. Having a solid plan in place reduces uncertainty and provides clear guidance for decision-makers and employees in critical moments.

Here are the key elements of a contingency plan:

• Risk Identification: Assess both predictable and unpredictable risks that could affect operations.
• Business Impact Analysis (BIA): Evaluate how identified risks could impact business functions and operations.
• Response Protocols: Develop detailed action plans to mitigate or minimize the impact of risks. These should be specific to the types of disruptions anticipated.
• Communication Strategy: Establish clear communication channels for internal teams and external stakeholders during an emergency.
• Resource Allocation: Identify and allocate necessary resources to implement the contingency plan effectively. This includes personnel, technology, and financial support.
• Testing and Drills: Regularly test and simulate crisis scenarios to ensure protocols work as planned and employees are prepared.
• Plan Review and Updates: Continuously review and update the plan to account for evolving risks, industry changes, and lessons learned from past disruptions.

By incorporating these elements, you can strengthen your ability to manage risks and ensure business continuity despite unexpected challenges.

Advantages and disadvantages of a contingency plan (CP)

Creating and maintaining a CP takes time, resources, and effort. While it offers significant advantages, it also comes with challenges, especially in terms of ongoing management and updating.

Here’s a breakdown of the key advantages and disadvantages of having a contingency plan:

Despite the challenges, the long-term benefits of preparedness and resilience make it a worthwhile investment for businesses of all sizes.

Why business contingency planning is necessary

We’ve seen firsthand how unexpected disruptions can bring businesses to their knees. From cyberattacks to natural disasters, these events can wreak havoc, costing organizations millions in revenue and trust.

 

Take, for example, the fire that hit the OVHcloud data center in Strasbourg in 2021. It left millions of websites offline, including critical government agencies and financial institutions. Companies with well-prepared backup systems activated their contingency measures, ensuring minimal disruption.

In contrast, businesses without such plans faced long outages, losing both revenue and customer confidence. Similarly, the Colonial Pipeline cyberattack disrupted fuel supplies across the Eastern U.S in the same year.

While their contingency plan allowed some operations to continue, the breach revealed gaps that led to fuel shortages and price spikes.

These examples make it clear: robust contingency planning is essential for protecting operations, reputations, and legal standing in a crisis.

It’s even necessary to make your business resilient. Here’s how:

While having a business contingency plan (BCP) may not be mandatory for every organization, it serves as a crucial safeguard during times of crisis.

However, for certain industries—especially those under strict regulations like healthcare, finance, and government—a BCP is not optional but a legal requirement.

“Organizations in sectors like healthcare and finance are legally required to have business continuity and compliance plans. Failing to prepare exposes them to severe penalties and potential lawsuits,” says Matthew Clark, attorney at The Clark Law Office.

Now that you understand the importance of having a Business Continuity Plan (BCP) to minimize losses and ensure your business’s survival through disruptions, it’s time to create or refine one.

How to create a contingency plan

Before we get into the details, there are two main approaches for structuring your plan. Both approaches have their benefits, so it’s essential to choose the one that aligns with your company’s needs.

Here is how they differ:

1. Umbrella Contingency Plan: This single plan covers all critical risks.
2. Multiple Specialized Plans: You can create several contingency plans, each addressing a specific risk (e.g., cyberattacks, natural disasters, etc.).

Before you choose an approach, consider your organization’s size, complexity, and the types of risks you face. While the format for both may vary, the core steps and principles of building a contingency plan are generally the same.

5 Key steps to creating an effective contingency plan

Let’s take a look at the main steps you can follow to create an effective contingency plan. By following this process, you can build a plan that’s both practical and tailored to your specific needs.

Here’s how to get started:

1. Recognize your core functions

Key elements in your business keep it running smoothly—be it your operations, departments, or technology. Recognizing these critical areas ensures that, when disaster strikes, you can focus on what truly matters.

This identification helps you prioritize resources effectively so recovery efforts target the most vulnerable spots, speeding up the recovery process.

Key elements for a contingency plan will differ from one business to another, depending on the nature of their operations, scale, and resources.

For instance:

• A healthcare provider might focus on safeguarding patient data, medical equipment, and personnel availability. So, it’s important for them to maintain uninterrupted access to patient records or ensure staff are available during emergencies.
• An e-commerce business might prioritize its online platform’s functionality and secure payment processing. Their key elements could include backup servers, warehouse operations, and delivery systems to ensure minimal downtime.

For your business, start by identifying operations that directly generate revenue, maintain customer relationships, and fulfill essential services – these are your core functions. Examine which processes, if interrupted, would immediately impact survival and customer retention.

Your core areas are the ones you’ll need to safeguard first in any contingency plan. By focusing on these critical operations, you protect your revenue streams and maintain customer trust, giving your business the resilience it needs to weather challenges.

2. Conduct a Business Impact Analysis (BIA)

A Business Impact Analysis (BIA) follows naturally after identifying core functions because it quantifies exactly how disruptions would affect your organization financially and operationally.

This analysis transforms your understanding from “this is important” to “this would cost us X dollars per hour of downtime.”

A BIA measures quantitative impacts, like lost revenue, increased expenses, and regulatory penalties, and qualitative ones, such as damaged customer relationships and brand reputation. It examines time sensitivities, showing how impacts escalate the longer a function remains down.

To pull off a proper Business Impact Analysis (BIA), you first need to take stock of your operation’s lifeblood—costs, revenues, and any promises you’ve put in writing. It’s essential to calculate the financial impact of disruptions, estimating potential losses over hourly, daily, and weekly periods.

Once you’ve done your arithmetic, sit down with the main heads of departments to identify process dependencies and minimum requirements needed to keep operations running.

For a clear understanding, look at these factors:

• Maximum Acceptable Outage (MAO): Determine how long each critical function can be down before severe damage occurs. For example, an e-commerce platform’s payment system might have an MAO of 24 hours before significant customer loss and revenue impact becomes severe.
• Minimum Business Continuity Objective (MBCO): Calculate the bare minimum operational level needed to survive during a crisis – such as maintaining 30% of normal production capacity or keeping core customer service functions running with core staff.

These clear benchmarks will guide your next steps.

Then, take a hard look at interdependencies. Sometimes, a little hiccup in IT can snowball into a full-blown catastrophe—customers left hanging, orders vanishing, and revenue going up in smoke. Map out these domino effects so you’re not blindsided when they start to tumble.

Based on this, you can put your insights into writing. To come up with a comprehensive BIA report, make sure you don’t miss out on any of these aspects:

Financial & Operational

• Detailed financial impact analysis per core function
• Process dependencies between departments
• Critical supplier dependencies
• Technology dependencies

Time & Recovery Metrics

• Recovery Time Objectives (RTO)
• Maximum Acceptable Outage (MAO) timeframes
• Minimum Business Continuity Objective (MBCO)

Resources & Solutions

• Essential resource requirements
• Potential workarounds and costs
• Key personnel roles
• Recovery strategy costs and benefits

Compliance & Impact

• Regulatory obligations
• Customer and brand impact assessment
• Historical incident data

3. Develop Response Strategies

After completing your BIA, developing response strategies is the logical next step because you now understand which functions need protecting and how quickly they must be restored. Your BIA findings directly inform which strategies will be most effective and cost-efficient for your business.

Start by creating specific procedures for each identified risk scenario. For example, if your BIA revealed that server downtime would severely impact operations, develop detailed protocols for both temporary workarounds and full recovery.

For each response strategy, cover these details:

• Assign primary and backup roles for each critical function
• Establish clear decision-making authorities at each level
• Create communication protocols for internal and external stakeholders
• Define escalation procedures and triggers
• Document resource allocation and mobilization plans
• Map emergency contact chains and backup communication methods

Consider both immediate response actions and longer-term recovery steps. For instance, your strategy might include immediate failover to backup systems, followed by a phased return to normal operations.

Your strategies should match your MAO and MBCO targets. They form the heart of your contingency plan, turning BIA insights into clear actions so everyone knows what to do during a crisis.

4. Document the Plan 

After identifying strategies and assigning responsibilities, the next step is to document everything in a clear, organized format. This will serve as a reference for all team members during a crisis.

Involve department heads and key personnel who will execute the plan, as their practical insights ensure the documentation is realistic and usable.

The final CP draft should be detailed according to the timeline and hierarchy with clear instructions.

Here’s what it needs to cover:

Leadership and Authority:

• Chain of command and decision-makers
• Emergency response team structure
• Alternates for key positions
• Activation authority levels

Response and Recovery:

• Plan activation triggers
• Step-by-step recovery procedures
• Recovery time objectives
• Resource mobilization protocols

Communication Framework:

• Internal notification procedures
• External stakeholder communications
• Media response guidelines
• Status reporting requirements

Support and Resources:

• Emergency contact directories
• Critical vendor agreements
• Equipment and supply lists
• Facility requirements

This documentation needs regular review, clear version control, and accessibility to all relevant personnel. Keep it simple, actionable, and up-to-date so everyone can understand and execute their roles during a crisis.

5. Test your plan and update it regularly

You can try out different testing strategies, including: 

• Tabletop exercises: walk through scenarios with key personnel
• Departmental drills: test specific function recoveries
• Full-scale simulations: activate an entire contingency plan
• Surprise elements: add unexpected challenges to test adaptability

Document everything during tests – response times, decision points, communication effectiveness, and resource utilization.

Gather feedback from all participants immediately after each exercise while observations are fresh. Use this information to refine procedures, update contact lists, and adjust resource allocations.

But don’t keep the plan aside once it’s finalized and tested. Your business constantly evolves with new systems, personnel, and risks – your plan must evolve too. Schedule testing at least annually, with more frequent drills for critical functions.

Assessing the effectiveness of your contingency plan

If you already have a CP, it’s important to evaluate periodically whether it’s truly effective. Plans can become outdated or incomplete, so regular assessments are critical to prepare you for today’s risks.

Start by asking yourself key questions about the following themes:

Risk Identification & Coverage

• Have you accounted for all potential triggers or causes of disruption?
• Does your plan address the most damaging risks to your operations?

Response Procedures & Clarity

• Are the instructions for handling emergencies clear, detailed, and regularly tested?
• Does your plan outline a timeline and sequence of actions to follow during a crisis?

Accountability & Responsibility

• Have you identified who is responsible for key tasks during an emergency?
• Are roles and responsibilities clearly assigned and communicated to your team?

If your answers uncover gaps, it’s time to update your CP. A strong plan isn’t static—it evolves with your business and the risks you face. Regular reviews ensure you’re ready to act when it matters most.

When is the contingency plan bound to fail?

A contingency plan is bound to fail in the following scenarios:

• Outdated or Incomplete Design: The plan doesn’t account for new risks or lacks comprehensive details.
• Insufficient Resources: Lack of budget, tools, or trained personnel to implement the plan effectively.
• Poor Communication: Key stakeholders and teams are unaware of their roles or the plan’s details.
• No Testing or Rehearsal: The plan hasn’t been practiced, leading to overlooked flaws and confusion during execution.
• Over-Reliance on Rigidity: The plan is too fixed and doesn’t allow for adjustments in unpredictable situations.
• Lack of Leadership Support: Without buy-in from decision-makers, the plan lacks direction and accountability.
• Stakeholder Exclusion: Input from essential team members is ignored, leaving critical gaps in risk assessment and solutions.

Failure to address these issues turns a contingency plan into a liability instead of an asset. To ensure success, you must treat the plan as a living document, continuously adapting and involving the right people to keep it actionable and effective.

Examples of contingency plans

Let’s look at some real-world examples to see how these plans help businesses not only survive but thrive during challenging times.

Campbells Prime Meat UK

Campbells Prime Meat relied on a Chiller Contingency Plan to protect their products after a fire caused £10 million in damages and left 300 employees jobless. The plan accounted for risks like equipment overheating, plant room fires, and major system failures. A backup system kept the products cool while technicians from Star Refrigeration arrived within 4–5 hours, minimizing losses and keeping operations stable.

Karmak Ransomware Attack

In February 2023, Karmak faced a ransomware attack. Their contingency plan, which included advanced security monitoring, helped prevent a data breach and protected their internal systems from further damage.

Gaille Media Goes Remote

Hurricane Harvey flooded Gaille Media’s Texas office in 2017, threatening to halt operations. However, with data stored in the cloud and a plan for remote work, the company continued functioning with minimal downtime.

Lush Cosmetics’ Home Delivery Shift

During the COVID-19 lockdown, Lush Cosmetics faced a crisis with closed stores and unsellable fresh stock. Within three weeks, they turned their shops into distribution centers and started home deliveries, saving the business and preventing significant losses.

These examples highlight the importance of preparation and quick action in managing unexpected challenges.

Conclusion

Now that you know how to create a contingency plan and the benefits it offers, it’s time to put it into action.

Start by identifying potential risks, outlining your response strategies, and ensuring all key personnel are on board. Regularly test and update your plan to ensure it stays relevant and effective as your business evolves.

By staying prepared, you can reduce the impact of disruptions and keep your operations running smoothly.