You’ve looked at every detail of your construction project and made estimations based on your careful planning and knowledge.
But you’re worried about what you don’t know.
How can you adequately or precisely prepare your budget when there are a variety of unforeseen events that can happen anywhere along the way?
You can’t remove all risk from your project, but you can minimize risk by considering a construction contingency.
If you’re not sure you need a contingency for construction, continue reading to learn:
Every construction project involves estimating the costs of every part of the job — and that’s a lot of details. Incorrect or incomplete estimations can ruin your budget, let alone extra costs that come when unforeseen issues arise.
Wouldn’t it be amazing if there was a way to plan for unexpected issues and costs?
That’s what construction contingencies are for, and Flexbase can help you know when to use those funds that you’ve set aside for surprises.
We can track cost analytics, so contractors know exactly when they need to use their contingency funds.
In addition to streamlining cost analytics, Flexbase makes construction administration easier by:
Flexbase has everything you need to successfully run your construction business — and it’s all in one place and is easy to use.
Construction contingency definition:
A project contingency for construction is a specific amount of money, usually a percentage of the total cost, that is set aside in case any unforeseen or extra costs arise during the construction process.
When you’re hit with surprises, construction contingencies act as a sort of insurance policy that will help you stay on budget and finish the work according to agreed-upon time commitments.
Contingencies for construction are not allowances or extra cash on hand that must be spent.
If your contingency isn’t used, that’s a plus, meaning you planned, estimated, and used funds well.
Contingencies should be considered part of your budget from the beginning rather than an add-on expense later on.
Construction contingencies happen for a variety of reasons such as:
In 2020, during the Covid-19 pandemic, many construction contingency funds may have been used when the price of lumber skyrocketed, causing an overage in the price of supplies needed.
The National Association of Home Builders estimates that “lumber prices have skyrocketed more than 300% since April 2020,” surely causing some contractors to dip into their contingency funds.
When it comes to construction contingencies, knowing when to use them is critical.
Flexbase accurately manages your cost analysis and can help you know when it’s time to dip into the contingency.
There are three types of construction contingencies:
No matter which type you may end up using, everyone agrees that construction contingencies are necessary for every project.
Everyone understands that:
A contractor contingency takes these things into account and allows the contractor to manage funds when problems occur out of the blue.
A contractor contingency is an amount included in the contractor’s estimated price for the project.
This amount goes beyond what is included in the schedule of values and is set aside for unanticipated costs or other problems that fall to the contractor.
Changes in the project are not always because of contractor oversights or errors.
Sometimes the owner may want to make modifications to the ...
… that were not included in the initial bid.
In this case, the owner contingency is an amount set aside to cover any changes that the owner requests along the way.
Owner contingencies are often used with guaranteed maximum price (GMP) contracts.
What if the owner contingency isn’t used?
Most owners will request for remaining owner contingency funds to be used for project improvements like:
Designers do their best to create thorough designs before a project is underway.
Oftentimes, though, design elements may change throughout the project because of:
When these issues come up after construction has begun, the designer may decide to use the design contingency to cover the costs of these issues that are outside the “as-bid” plan.
Typically, most construction projects use a contingency rate of 5% to 10% from the total project budget. This is typically enough to cover any unexpected costs that may arise throughout the project.
Even though everyone involved on the planning end of a project makes a thorough analysis of what it will take to complete the job, many things contribute to the need for contingencies, like:
The construction contingency acts as a sort of insurance policy in the case of unforeseen changes or additions — like weather delays or materials shortages.
Having a construction contingency lets you plan for the unexpected, allowing you to stay on budget and on time with your project.
Though construction contingencies shouldn’t be considered as “extra cash,” a contingency benefits everyone involved when things out of your control happen — things like:
Construction contingencies help you:
Surprises often throw us for a loop, but the cost of those surprises can derail your project — unless you have a construction contingency.
A construction contingency allows you to manage the unexpected and can even help keep you on budget.
Since the contingency is an amount built into the cost estimate, unforeseen costs can be handled without putting a major dent in the budget.
All kinds of things can threaten your budget:
But with a construction contingency budget inclusion, your budget remains safe even when unexpected changes and costs occur.
And the construction contingency is part of the budget, not an add-on, so your budget isn’t inflated, assuring you that you’ll be able to handle the surprises when they come.
Risk is high in the construction industry, there’s no doubt about it.
Adding construction contingencies to the pricing estimate is just one of the ways to minimize risk and deal with unexpected issues and costs.
In general, most construction projects use a rate of 5-10% of the total budget to set the construction contingency amount.
Setting the amount of the construction contingency can be tricky.
You want to make sure you have enough set aside to handle the unanticipated issues, but you also need to make sure you keep enough cash on hand to keep the project moving along.
Managing cash flow is challenging in the construction industry because of the rate of cash flowing in and cash pouring out.
Flexbase not only has the tools to help you know how much cash you actually have on hand, but when you need working capital, we can help you access it in just one click.
Including a contingency clause in a contract is essential, and setting the proper amount is crucial.
Construction contingencies should outline:
Each contingency should outline the set aside amounts decided upon and what types of costs the contingency should be used for.
In addition, the contingency clause should spell out how the contingency funds are to be accessed and what the approval and paperwork process may include. The clause should also contain wording that explains how unspent contingency funds will be handled.
When creating the construction contingency budget, plan for the worst and hope for the best.
Factoring in risks ahead of time like ...
… can help you know where you may need to allocate contingency funds and what the amount of those set-aside funds should be.
Identifying potential risks is necessary, but minimizing risk is a way to be proactive.
Communicating well with your team and performing careful and detailed planning will go far in minimizing risk.
When attempting to minimize risk, it’s important to:
All of these will foster good communication with the whole team, so everyone knows their roles and duties.
Though a construction contingency and a retainage are similar concepts, they are not the same thing.
How are they similar?
That’s where the similarities end and the differences begin.
The biggest difference between the two is that a retainage consists of monies that are earned and are owed to someone, and a contingency is not owed to anyone.
A contingency can end up being a positive thing if the funds aren’t used for unanticipated issues.
No, the Basis of Estimate (BOE) is not designed to cover surprise costs. Instead, the BOE accounts for the expected time, resources, and money needed to complete the construction project.