What is Construction Contingency?
A construction contingency is the amount of money allocated to pay for additional or unexpected costs during the construction project. Typically, a 5-10% calculation of the construction budget should be allocated to your construction contingency.
This construction contingency is a key aspect of your risk management protocol to ensure that your construction project can remain viable. Think of it as insurance in the event of surprise costs or delays, allowing you to still meet your project commitments.
The construction contingency is there to help you and your construction team manage additional costs that come from factors such as weather delays, supply and resource management, personnel costs, etc.
It’s important that this budget is not viewed as extra money or money that needs to be spent. In fact, not using your contingency is great news. This means your project was planned, estimated, and managed properly.
Ultimately, the success of your project comes down to the work you do before you start bringing in the heavy equipment and the on-the-ground experts. This is why we at PCS, want you to work with experts like us who are committed to Improve Cost Certainty™ in the construction industry.
With thorough independent review, construction estimating, and professional planning and budgeting, our expectation is that you won’t need to use your construction contingency.
However, this doesn’t mean that you don’t need a contingency budget – to be successful, you need to plan and be ready for the unexpected. Doing so, mitigates your risk, giving you the confidence that your construction project will not experience devastating cost overruns and delays.
Why is Construction Contingency Important?
Construction contingency is important because of the inherent pressure and stress that comes with every construction project. Everyone involved in the project is under pressure to meet deadlines, design plans, budgets, and resource schedules.
This means that there are times when corners may be cut or decisions might be rushed, in an effort to stay on budget, time, and plan. Doing this is not the key to a successful construction project, and underscores why the construction contingency is so important.
The construction contingency, as we explained above is your insurance that you and your team are able to manage the unexpected. It helps eliminate the panic that happens when the weather causes delays or there is a personnel shortage or a change in expected government funding.
When we talk about construction contingency with clients, we’re often asked questions like:
- Shouldn’t the Basis of Estimate (BOE) construction cost estimate process prevent the need for a contingency? No, the BOE is used to define the time, resources, and money required to successfully complete a construction project on-schedule and on-budget. It cannot account for surprise construction costs.
- Doesn’t value engineering mitigate the need for this kind of budget? No, value engineering is used to provide a clear and detailed analysis of how best to meet the goals of the construction project.
- Does the construction contingency guarantee against cost overruns? Having a construction contingency gives you the ability to manage unexpected costs and delays, mitigating the chances of cost overruns. However, the true guarantee against cost overruns is professional independent review.
- How do I know this allocated money won’t be abused? You need to trust your team and partners.
- Doesn’t this construction contingency inflate my budget? No, the contingency actually helps you stay on budget and schedule.
The answers to these questions come down to having confidence, trust, and a professional independent review company working for you. There are no guarantees in any line of work, including construction, but a construction contingency gives you a guarantee that you can manage risk and the unexpected.
We want you to think of the construction continency as a necessary part of your construction plan and budget. This contingency is not an extra add-on – it’s a necessary aspect of a professionally managed and planned construction project.
In fact, we would argue that any company who tells you that you don’t need a construction contingency should not be trusted.
The Different Types of Construction Contingency
There are three different types of construction contingency:
The owner construction contingency covers the costs that come with owner requests for changes to design, schedule, resources, and personnel. Think of things like adjustments to the construction plan to accommodate for unexpected environmental conditions, a change in funding due to cancelled or delayed government guarantees, or a failure of one of your contractors to provide adequate personnel for the project. And yes, professional independent review and the BOE should prevent such occurrences, but it’s important to be prepared for anything that can introduce risk into the project.
Your general contractor should discuss a construction contingency with you. This contingency gives the contractor the ability to adjust for and manage unexpected costs, while still ensuring success. It’s important that you and your contractor agree that costs do fluctuate and that there is a degree of unpredictability in every project.
While the design and materials are reviewed, analyzed, and undergo value engineering, there might still be changes. This can happen for example, when materials aren’t available, scope creep requires changes to the design, or when general upgrades are required.
What You Need to Know About Construction Contingency
Having a construction contingency doesn’t mean that your project is at financial risk.
A construction contingency protects your project from the unexpected problems and issues that put many poorly planned and supported projects at risk.
Yes, a construction contingency requires you to allocate 5-10% of your overall budget to contingency. This is your insurance; it lets you feel confident that you can manage the traditional problems that have put many construction projects into a state of failure.
We understand that you ultimately just want to see your construction project come to life. This is why PCS is here. We’re here to do the analysis, review, question-asking, budgeting, and number-crunching that gives you confidence.
Contact us to talk about how PCS applies its industry experience and proven methods to help you avoid problem bids, stay on budget, limit costly overruns and gain more value for the construction dollar.
About the author
Lee Thomas, MBA is the chairman and CEO of Project Cost Solutions. Lee has over 20 years of hands-on operational process experience under his belt. He is deeply committed to seeing your construction project succeed.