Recently, we were trying to close the gap between our project budget and progress estimate, looking for options, the owner honed in on the contingency as an easy way to cover the delta, offering up, “Let’s reduce the contingency from 5% to 1%. We will be on budget and move forward.” Although this was by far the easiest solution to get us on budget, I encouraged him to explore other options. When he asked me to explain why he needs a contingency fund, I responded “Do you like your job? Contingency allows you to keep it.” We remained at 5%. The fact is, contingency is, if nothing else, an insurance policy.
Contingency is usually a hot topic, regardless the team member’s title. Design teams want to be assured that the owner has a contingency fund in place. The reality is, no drawings are perfect and unforeseen conditions need to be addressed (paid for) to keep the project moving forward. I have found that if you explain to your design team that there is contingency fund in place and outline the expectations of its use, they are comfortable moving forward.
Over the years, we have seen a variety of responses to contingency funds from the general contractors. While working with a general contractor on a particular agreement, we communicated that the owner would carry the contingency in their budget and no contingency would be allowed in the GMP. This position became such a point of contention that the contractor would not sign the agreement without a minimum contingency amount being part of the GMP agreement. During the negotiations it was stated by the general contractor that “this is industry standard,” “all contracts are structured this way” and so on, but, this is not true. The reason for the push back? Simple. Risk management. Having a percentage of the project budget set aside for contingency to be used at their discretion, allows the general contractor to cover errors and omissions, unforeseen conditions and bid errors, without requiring the formal approval of a change order. Again, it’s reality. Just as no drawings are perfect, no bid is perfect either. We have not allowed the design teams, material testing companies or other consultants to carry their own contingency, why have it with the general contractor? We rarely allow contingency to be held by the general contractor; but, it’s sometimes worth considering. Here are some pros and cons:
- Less relationship strains when there are pre-approved funds to cover miscellaneous items.
- Consider this money spent. It is rarely returned.
- Benefits the owner if you have a cumbersome approval processes related to cost increases.
- We encourage you to put in place an approval process to track the funds, so you know what is being spent during the project, not just at the end.
- You may see a more honest approach to the GMP. Contractors are likely carrying contingency in the GMP. It’s just a matter of them showing it to you explicitly or not.
~ Paul Wember, Owner’s Representative