A construction contingency is the amount of money allocated to pay for additional or unexpected costs during the construction project. Typically, a calculation of 5 to 10% of the construction budget should be allocated to your construction contingency. This contingency is usually calculated as a percentage. If the phase is 100 days of effort, the 20% contingency would be another 20 days.
As the project progresses, the level of risk decreases as the requirements and problems are known, so the percentage will decrease. In the closing phase, the percentage added could be as low as 5% or none at all. Home builders and remodelers typically allocate between 5% and 10% of a project budget for a construction contingency. This amount creates enough breathing space for unexpected expenses.
Anyone who tracks estimates and costs manually calculates a contingency percentage on top of all costs, before profit margins are applied. Whether made on paper or calculated by hand, these methods offer familiar and accessible estimation options that put budgets and proposals in the hands of customers. However, any price negotiation or recalculation requires careful follow-up and runs the risk of human error. When the project has a known time scale and schedule, a likely contingency of inflation or escalation can be predicted.
This is usually calculated by calculating the predicted annual change in the index to the midpoint of construction. Contingency allocations support the overall risk management strategy of a project by making an allocation for any cost changes. Home builders and remodelers also use accounting software, such as QuickBooks, to track project finances. For example, a highly complex project using new technology may require additional time to complete and funding to address any unexpected challenges.
Project contingency is simply the process by which uncertainty is taken into account in that estimation when considering any risks. However, a single-point estimate for the project assumes that the project will cost so much and clearly does not take into account the uncertainties and risks affecting the project. Contingency should be estimated for situations where requirements or resources change: by viewing project management through the reach-cost-time triangle, each of these areas can be affected. This is then added to the original estimate to ensure that the company is prepared for the worst-case scenario that could otherwise derail a project.
In this method, an expert, or a group of experts with a solid base of experience and competence in risk management and analysis, determines the contingency percentage for the project. These default sums or percentage allocations are included in the cost estimate and are maintained on behalf of the owner to allow for unpredictable changes to the project. Elizabeth Harrin is a member of the Association for Project Management in the United Kingdom, a trainer, mentor and author.