Understanding Cost Contingency

What is a Cost Contingency Sum?

Contingency is a proportion of your budget that must be allocated for unforeseen costs. Your design and construction teams should help you to avoid spending this unnecessarily, but it is important to be aware that it is normal to expect some unplanned costs on almost any construction project.

Contingency may be required due to the condition of an existing building or site, errors or omissions in surveys, designs or information, regulatory requirements, non-performance by suppliers or members of the design or construction team, statutory requirements, weather, political or economic conditions, national or international events, or other unforeseen circumstances, etc.

How to allocate a cost contingency sum?

When planning your cost contingency there are two key points to consider. The first is whether your contingency sum should be allocated within your project budget or whether you would have sufficient funds held separately that you would be able to use for this purpose if required. If the project budget is fixed and no other funds would be available then the contingency sum must be allocated within the project budget, however if you have greater flexibility then you may wish to consider allocating your contingency separately.

The second is what level to set your contingency percentage at. 10% is generally suggested by many in the construction industry, but for a higher risk project it may be sensible to increase this. Provided good teams and processes are used, the risks of unforeseen costs generally reduce as a project progresses, particularly during the construction phase. Towards the end of the project, you may decide to reallocate a portion of any unspent contingency funds to improve or increase other elements of the scope of work (i.e. increased budget for fixtures and fittings).

How to reduce the use of cost contingency?

Contingency is a sum of money allocated to cover potential unforeseen costs. While it is essential that you have a contingency sum available, there are steps that can be taken to reduce the chance that it will be required.

In some instances it is possible to develop a less risky scheme, perhaps avoiding reliance on elements of the existing building or site that are not fully understood. Undertaking the best possible investigations and background checks of existing site and buildings should help to identify any issues early on and you can then plan for them accordingly. Appointing an expert team of designers and consultants will improve the effectiveness of your designs and projects processes. Preparing a detailed and comprehensive package of design information will reduce the chances of variations during construction, as will your choice of the right building contractor.

When reviewing tender returns from different contractors it is sensible to consider how well they have anticipated potential additions or unknowns. A proactive and well-managed contractor may include provisional costs for additions they anticipate may be required. While their initial tender may appear more expensive, this level of transparency and foresight is likely to result in less reliance on contingency and a less expensive project overall.