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What are Contingencies in Construction

What are contingencies in construction

In construction, things sometimes go differently than planned. Unexpected problems like bad weather, material shortages, or design changes can arise. Construction projects set aside extra money called contingencies to handle these surprises. This fund keeps the project on track and budget.

Contingency planning is crucial. Suppose you’re building a house and find unstable ground. In that case, a contingency plan ensures you have the funds to fix the issue and continue. Without it, you might run out of money and have to stop work.

Today, we will learn about these construction contingencies and other related aspects.

What are Construction Contingencies?

Construction contingencies are designated amounts of funds in a project budget to cover incidental costs and issues. Imagine you’re building something, and a problem, like a design change or a weather delay, pops up. These problems cost extra money. A contingency is a safety net, ensuring you have the reserves to address these surprises without stopping the project.

Why are They Important?

Contingencies keep construction projects on a path. Without them, unplanned expenses could derail a project, causing delays or stopping work. While working builders find an issue with the footing. In that case, the contingency resource hides the additional costs, allowing work to continue smoothly. This planning reduces financial risk and gives peace of mind.

Builders and project managers can focus on their work without worrying about budget surprises, ensuring the project remains efficient and within budget.

Construction site showing a contingency chart and types in contingencies

What are the Types of Construction Contingencies?

Contractor Contingency

A contractor contingency is an added money kept aside by the builder for incidental events during construction. These costs include plan errors, unforeseen repairs, or changes in material prices. The contractor uses this money to keep the project moving smoothly without asking the owner for more money. This helps maintain the project’s budget and schedule, reducing financial risk for the contractor and the client.

Owner Contingency

An owner can decide on additions or project improvements beyond the initial scope of work, raising the budget. He can decide on changes, like upgrading materials or adding new features. It is preferred that modifications be made to this fund without causing delays or needing extra funding. It helps manage risks the contractor can’t control, like unforeseen site conditions or regulatory changes.

Design Contingency

Still, changes can occur during the design phase of the construction. A design contingent fund is applied to fulfill these requirements. Sometimes, initial designs need adjustments due to practical considerations or new information during construction.

This fund allows designers to make necessary changes without affecting the overall budget. It helps manage design errors, scope changes, and material availability risks, verifying that the project remains feasible and within budget.

Methods of Calculating Construction Contingency

Deterministic Method

The deterministic method is a straightforward way to calculate construction contingencies. It involves a fixed percentage of the project’s total budget, usually between 5% and 10%.

The formula would be:

% x Project Base Cost Estimate = Contingency

For example, if a project costs $100,000, a 5% contingency would be $5,000.

Probabilistic Method

The probabilistic method is more detailed and concerns assessing potential risks and their impacts. The project team identifies possible risks, like delays or material shortages, and estimates the probability and cost of each risk.

They multiply the likelihood by the price to get each risk’s expected monetary value (EMV). Adding up all these EMVs gives the total contingency amount. This method provides a more accurate budget for complex projects by considering specific risks rather than using a flat percentage.

Expected Monetary Value of Risk = Probability of Risk Occurring x Impact if it happens

Benefits of Contingencies in Construction

Project Budget Protection

Construction contingencies help save the project budget by preserving supplementary resources for unseen circumstances. This means the main budget remains intact, avoiding needing more money and keeping the project financially stable.

Financial Risk Reduction

Contingencies reduce financial risk by acting as a safety net. Unexpected problems, like material shortages or design changes, can quickly increase costs. With a contingency fund, these shocks are safe from risking the project’s financial health. This safety net will ensure that the project continues without major economic disruptions.

Restoration of Mind Comfort

A contingency fund provides peace of mind for everyone involved in the project. Builders and project managers know they have a backup plan for unexpected costs, enabling them to concentrate on producing high-quality work without worrying about budget issues. The confidence gained from having a contingency fund helps the entire project team work more efficiently.

Enables Project Planning

It forces the project team to think about potential challenges and form techniques to manage them. This level of preparation helps navigate complex processes, like obtaining permits, where delays are expected. Effective contingency planning leads to better overall project management and smoother execution.

How to Use Contingency Funds

Handling Labor Shortages

Contingency funds manage labor deficiencies by covering the costs of hiring additional workers or training local ones. In a remote area with few skilled workers, the contingency fund can pay to bring in workers from other locations or train local labor. This way the project continues without delays caused by a lack of skilled labor.

Managing Material Price Fluctuations and Lacks

Material prices can rise due to supply chain issues or market changes. Contingency funds cover these extra costs, ensuring the project stays on budget. For example, the fund can cover the additional expense if steel prices suddenly increase. It also helps if there is a material shortage by allowing the project to purchase alternatives or expedite shipping to stay on schedule.

Dealing with Weather-Related Delays

Severe environmental changes, such as storms or heavy rain, can delay construction. Contingency costs cover securing the site, repairing damage, and paying extra labor to catch up. If a storm damages materials, the contingency fund can quickly replace them, keeping the project on track with minimal disruption.

How Builders and Contractors Manage and Access Contingency Funds

The construction contractors implement contingencies manually or with software.

Manual Methods

Manual methods use spreadsheets to track and manage funds. The home builders set 5-10% of the project budget in a spreadsheet and update it as costs arise. While simple, this method requires careful attention and regular updates to avoid errors.

Software Methods

Specialized software makes performing contingencies easier and more accurate. Construction management software can automatically track expenses, adjust budgets, and generate reports. Programs like Google Sheets and Microsoft Excel offer essential tools. At the same time, advanced software like Bauwise provides integrated solutions for managing contingencies across different budget units. The software reduces errors and saves time, making it a preferred choice for many projects.

Processes for Accessing

Accessing contingency funds involves a clear and organized process:

  1. Identify the Need: When an unexpected cost arises, the project team identifies the need to use the contingency fund.
  2. Request Approval: The team submits a request detailing the unexpected cost and why funds are needed.
  3. Review and Approve: A designated person or committee reviews the request. If valid and within the project’s scope, the funds are released.
  4. Document the Use: The project team documents how the funds are used, tracks expenses, and provides transparency for future reference.

Best Practices for Contingency Planning

Here are some of the tips to use this contingency in construction.

Establishing Clear Guidelines and Processes

Start by defining what the contingency fund will cover, such as unexpected repairs, material price increases, or design changes. Everyone’s understanding of these guidelines is essential for the project team. Create a straightforward approval process for accessing the funds.

This process should include submitting a request, reviewing the request, and documenting how the funds are used. Clear guidelines help avoid misconceptions and confirm that contingency funds are used effectively and transparently.

Adjusting Contingency Amounts Based on Project Type and Complexity

Simple projects only need a minor contingency, around 5% of the budget. However, more complex projects with higher risks, like large commercial buildings or renovations, might need a higher contingency, possibly up to 20%. Consider factors like project size, location, and the likelihood of unexpected events when determining the contingency amount.

By tailoring the contingency to the project’s specific needs, you ensure that you are prepared for potential issues without overestimating and unnecessarily increasing the budget.

Final Thoughts

Contingencies in construction are vital for addressing unexpected costs and guaranteeing projects stay on the path. With supplementary money, construction teams can handle surprises like material shortages, labor issues, or weather delays without disrupting the budget or schedule.

Incorporating well-thought-out contingencies into construction planning ensures that projects can adapt to challenges and continue smoothly, generating predictable and prosperous results.

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