A good contingency plan requires continuous thought and planning, whether you are going on vacation to Mexico, climbing Mt. Everest, or tackling a capital improvement project–things go wrong. As a father of three, and a business owner, I find myself commonly swerving through what could go wrong next and how to circumvent potential obstacles and recover from bumps in the road. I am not being pessimistic; I am being a survivalist.
When it comes to navigating a project budget, proper management of the contingency is an area that can influence a successful project outcome. Who manages it? Who carries it? And, how do you make sure it doesn’t get inflated to the point of stopping your project? While there are many discussions on the subject of contingency we could hash over, this blog addresses why an owner and general contractor would want to have a portion of the contingency in the GMP.
1) Does it exist?
Having the contingency in the GMP as part of the budget gives the general contractor, and the other consultants, confidence. They are able to adjust their risk management by being informed and not operating with a blind spot. Owners can tell a project team the contingency exists, but many have been burned by having those funds removed when there is a change in leadership or poor budget management.
2) Can I access it?
Just because a contingency exists in the master budget, doesn’t mean that the owner will release it. Having the contingency in the GMP prompts the necessary conversation of how it can be used and when; this communication often leads to smoother approval processes.
By setting up the contingency in a transparent manner, the hired team members appreciate the respect of being treated as trusted partners.
On publically-funded projects, change orders are often heavily scrutinized and can slow a project to a halt as they await approval. By having the money approved as part of the GMP, change orders are essentially already included in the budget and can be directly approved by the team. There should always be an approval process to release contingency.
We have all seen the dreadful RFP questions asking for project data including original project budget and final cost; you can explain the reasons why there were change orders to get to the new amount but it never looks good, even if they added value to the project. With the contingency in the GMP, it allows for the marketing team to state that a project met its budget and there were no “change orders.”
Although we see advantages of having a portion of the contingency carried by the CMaR, it is not something that we put in the “strongly recommend” category. There are many projects that we manage in which the contingency is handled by the owner directly, and contractor contingency is managed through dedicated allowances; you need to decide what is best for your given situation.
~ Paul Wember, Owner’s Representative