We had a great question come up at last week’s workshop about when contingency would be used to pay for an unforeseen circumstance versus when it would be appropriate for the contractor to request a change order.
Contingencies are often established within budgets to cover overages which may occur, in particular when the contractor is giving a GMP. They are a way for the contractor to mitigate their financial risk. Often these are established using a percentage of the cost of work estimate. They may be used to pay for costs such as unplanned direct labor, direct expenses that are not reimbursable, or unplanned consultant fees. These are all internal budget items for the contractor.
Reasons why these unplanned costs may be incurred include such situations as pricing errors, issues arising from pricing on incomplete drawings, contractor errors, and other unforeseen conflicts & issues.
If the contingency is not spent, depending on the agreement between the owner and contractor, the money may be kept by the contractor. It is often in their best interest to not spend their contingency when possible.
So, if there is a change in scope for the project, for instance the square footage of the building is expanded, the contractor will request a Change Order to cover the higher costs.
If the contractor neglected to price the metal panels that were clearly documented in the pricing documents they will be required to cover the costs of the panels themselves and might use their contingency to do so.
If after the site is investigated and a soils report is done an unexpected soil condition (not shown on the report) is found which would necessitate a lot of additional, costly, site work it is not in the contractor’s best interest to use their contingency to pay for the additional work. The owner may push for the contractor to use their contingency, but as this was an external issue that is causing the contractor to do additional unforeseen work they are entitled to a change order which would give them additional funds to complete the additional work.
Contingencies are internal budget items. Change orders (from the contractor’s perspective) are brought on by external factors. It’s also important to remember that all team members will likely have their own contingencies to help compensate for unforeseen overages and mitigate their risks.
Hope this helps!