Posted June 19, 2018
When construction professionals talk about contingency, we don’t mean a catchall term to cover ignorance! A cost contingency is a legitimate budget incorporated into the overall cost plan of the works. It is an estimation of the known-unknowns, that is elements of the work that have some degree of uncertainty regarding the amount or ‘scope’. In this article we’ll explore some examples of both legitimate and not so legitimate contingencies so that you can better understand the process and be informed when speaking with your design professionals. If you’re still unsure as to why you need a contingency read on…
A contingency, put another way, is an amount of money either held in reserve by the Client, or as a provisional sum within the contract. This then has certain conditions under which the builder can draw down on this money in order to deal with unforeseen circumstances. It’s worth stressing that the project team does not see a contingency as a license to print money and we demonstrate to our Clients that they are only to be used on specific identified risks. Furthermore, the Client must respect the ‘pot of money’ in the contingency and not be tempted to use it to cover the cost of for client instructed variations or extra work. Neither should a contingency be used to plug the gap between incomplete design documentation which should have been resolved before the project starts on site.
So how much money should a client set aside for the contingency? The sum will vary according to the type of project. A renovation project with significant structural alterations will be higher than a new build project in a greenfield site. A 5% budget is normal on a new project, whereas contingencies of up to 15% are common to existing buildings which are listed. That being said, wherever possible a generic rate should be avoided and a defined amount of monies relating to a specific risk should be assigned.
Any project which involves ground works will have an element of risk associated with it and therefore should have a contingency. Even with the most detailed of ground surveys, it is impossible to look under every grain of sand or soil which is why a degree of risk remains until the foundations are excavated. This is similar with renovation works. For example, when dealing with demolition and structural works to existing walls, a degree of risk remains which may alter the construction methodology, the time allowed, or the amount of material required. Covering costs incurred in these circumstances would be a perfect use for the contingency.
Now we have a better understanding of what a contingency should be used for let’s explore what a contingency is not. Whilst we encourage all design decisions to be made before work begins so that we can offer a fixed price we understand that clients may wish to change their minds. For example, a Client may decide to extend the size of their extension, or knock through an existing wall, not previously ear marked for demolition, to create more open plan space. In these cases, the contingency should not be used to alter the agreed works. Instead a separate pot of money should be used to first alter the design, recost the revised design and then used to instruct the variation, therefore preserving the contingency for its genuine use.
We hope that this article has been useful offering a snapshot as to how we plan and manage your project from a financial perspective. If you liked this article, check out [the costs of a new house] which offers a holistic view as to the potential cost of your project. As always, these articles offer a general introduction and should you require professional advice as to the specific circumstances of your project, do get in touch, we’d be happy to help.