Even the best-laid plans can change. During construction projects, project managers and their organizations must stay ahead of all alterations to original project parameters for both legal and fiscal reasons. This requirement means documenting all changes to plans, project time-frame projections, billing statements, providing funding, and more.
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In this blog, we talk about construction contingencies, the different types of contingencies, how these contingencies receive funding, and more. To learn more about digital storage of real estate documents, automation of business processes, and more, keep exploring our website or fill out our convenient contact form to schedule your consultation today.
What Is Construction Contingency?
In construction, contingency refers to the portion of the budget set aside to cover unanticipated costs related to materials, labor, permitting, and other needs. These monies remain unallocated as a separate part of the construction budget throughout the project. In a way, construction contingencies act as insurance against unexpected costs.
When planning for real estate development or general construction, the amount of contingency baked into the budget depends on various factors. Organizations and their accounting experts must have enough liquid assets to keep construction going but enough money waiting in the wings to help should something go wrong. This requires a careful balancing act in most cases.
Types of Construction Contingencies
Two main types of contingency exist in most construction budgets.
Owner Contingencies
Primarily used in guaranteed maximum price (GMP) contracts, owner contingencies include amounts set aside for additions or modifications during the course of a project’s execution.
At the beginning of any owner-financed construction project, the owner and their chosen contracting team develop a detailed construction plan, including floor plans, building materials, labor costs, project time-frames, and more.
If at any point during the project the owner decides to alter plans, make changes to desired material specifications, or hire additional labor, owner contingency budgets cover these costs.
Contractor Contingencies
When working on real estate development projects or even single-property construction, experts benefit from performing cost projections before signing initial contracts.
During these planning stages, contractors estimate an amount appropriate to cover risk factors such as unanticipated changes in labor, material, or general construction costs.
Contractors consider these funds as spent money, in order to have this money on hand should extra expenses occur. In this way, contractor contingencies serve as insurance not just for the contracting company, but for the real estate development project as a whole.
Some projects may have both types of contingencies in play, depending on how the project becomes financed, what type of real estate is being developed, and other factors. In these cases, construction contracts must detail both types of contingencies before work begins.
Funding Construction Contingency Budgets
Contingencies in fixed-fee contracts become part of the overall price of the project. In this method, owners do not set or account for contractor contingencies, and may not even be aware they exist. In the event that the contingency remains unused at the end of the project, any amount in the fund becomes additional profit for the contractor.
In cost-plus-fee contracts, owners fund contingencies as they arise. In these scenarios, limits to the owner-funded contingency may be predetermined at the outset of the contract. Once these funds become exhausted, any remaining contingency costs fall to the contractor to pay.
Managing Contingency in Construction Projects
Every construction project presents unique challenges. For this reason, construction companies and real estate development firms benefit from managing contingency in a construction project.
Managing contingency as part of housekeeping and customer service includes procedures such as:
- Electronic document storage
- Material cost projections
- Labor estimates
- Running budget information
- Owner-contractor communications
- Legal documentation
- Permitting
- And more
When using contingencies during a construction project, contractors must give notice and receive approval according to existing contract terms. Additionally, any disputes that arise from contingency usage must be resolved before a project may resume under those conditions.
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