A construction contingency, as it relates to a build project, is a percentage of a contract value set aside for unpredictable changes in the scope of the work.
Whether a construction contingency is added by a contractor to his estimate or is added as a percentage by an owner to his budget, both use it as a risk management tool to financially prepare themselves for any risk associated with a specific project.
No construction project is perfect and there are always some items that are inadvertently overlooked, assumed to be covered by others or are unforeseen altogether in preparing project cost estimates.
In some cases, items that were left out could not have been anticipated at the time of estimating. A construction contingency, depending on whose perspective you view it from, could be an excuse for poor estimating when added by a contractor.
If a contingency or percentage of the construction cost is added as a safety net, then that contractor need not be as thorough in his cost estimating. Using a construction contingency as a catch-all and in the absence of a detailed estimate may make that contractor not as competitive as others.
Contractor Construction Contingency Cost
A contingency can be viewed several different ways. On a lump sum contracted project where it is included by the contractor and a detailed breakdown not provided to an owner, the contractor can use this to cover any shortfalls or missed items in his original bid.
He can also use it to his benefit in offering to absorb the cost of minor items or changes requested by an owner so as not to appear they are “nickel and diming” the owner for small inconsequential costs.
This is favorable in the eyes of an owner when the contractor provides added benefit without costing the owner any money.
Owner Budgeted Contingency
Many times contracts will stipulate that a construction contingency be used only with the owner’s approval and any unspent funds are credited at the end of a project.
Or, the owner may elect to use unspent contingency to offset the cost of any change orders requested by the contractor for extra work or changed work initiated by the owner.
In this instance, the contractor should not be allowed to markup changed work covered under the contingency because markup was already realized by the contractor on any amount included in the original estimate if itemized before fee.
In many projects, especially public projects, a contingency can be added in an amount of anywhere between 2% and 10% by the public entity for remodel or renovation work.
This is added to cover any non-contractor caused delays or minor non-scope changes without interrupting the flow of the work. Decisions for managing risk through use of these funds would then be made by the owner’s project manager or representative generally on a case by case basis.
Contingency Defined During Contract Negotiation
Construction contingency funds are usually used first to complete contracted scope or to deal specifically with unknown conditions as opposed to funding scope changes.
Any potential conflicts regarding use of contingency can be limited if all parties involved in the project agreement understand the purpose of the contingency and how it will relate to their respective roles during the course of project construction.
Filed under: Contracts