Contingencies in construction
Contingencies are downside risk estimates that make allowance for the unknown risks associated with a project.
Typically, contingencies refer to costs, and are amounts that are held in reserve to deal with unforeseen circumstances. However, they may also refer to other aspects of the project, for example, the programme may include a contingency where it is important that a specific completion date is achieved.
A contingency may also refer to part of a contingency plan, that is a plan than can be enacted to mitigate project risks, such as adverse weather, an industrial dispute, supplier failure and so on.
Monetary contingencies are typically referred to in relation to the overall client for a project. However, other parties in the supply chain are also likely to include contingencies in their cost planning.
Whilst it is advisable for clients to hold a contingency, they might no wish to share this information with the rest of the project team, who may see a contingency as a license to exceed the budget in the knowledge that the client has a reserve that can be spent.
Contingencies are often expressed in terms of percentages. The percentage contingencies applied are at their greatest in the early stages of the project when there are the greatest number of possible risks. But they can then be reduced as better particulars about the project become available and some risks have passed or been overcome.
An example of how a contingency might be reduced during a project is set out below:
- At the preliminary business plan stage, total cost estimates might include a 15% contingency.
- In the elemental cost plan this might reduce to 10% of fees and construction costs.
- On awarding the contract, 5% of the contract value might be included as contingency in the cost plan.
In addition to a contingency, the client is likely to hold retention. Retention is a percentage (often 5%) of the amount certified as due to the contractor on an interim certificate, that is deducted from the amount due and retained by the client. The purpose of retention is to ensure that the contractor properly completes the activities required of them under the contract. Retention can also be applied to nominated sub-contractors, and the main contractor may also apply retention to domestic sub-contractors.
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