Understanding the concept of contingencies in project estimation is paramount for ensuring profitability and mitigating potential risks. This article delves into the specifics of what contingencies are, how they influence project costs, and the importance of properly managing them in the context of contracts and client relationships.
Key Insights
- Contingencies are additional costs factored into project estimates to cover potential unknown or unexpected expenses. They can include aspects like additional labor, material, or other factors that might impact the project cost.
- The role of an estimator involves identifying potential risks and incorporating contingities to mitigate these risks. If certain contingencies don't occur, like rain delays, these funds aren't necessarily returned to the owner, unless specified in the contract.
- Some contingencies can be hidden from the client, such as costs associated with difficult clients or coordination between different trades. However, client-exposed contingencies may be subject to credit requests if the conditions aren't required, emphasizing the importance of careful contract agreement and management.
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So at this point you must be asking yourself, well, what all these adjustments for risk, markups, or add-ons are that we're talking about? I just want to estimate. Well, keep in mind that there are many aspects of estimating, and this is putting the icing on the cake, so to speak. You won't be in business very long if you don't cover all your bases on some of these costs.
And so let's quickly define what contingencies actually are. These are additional costs associated with completing the project as required in an autonomous manner to make a profit. Contingencies are a padding to your estimate for unknown factors.
Now contingencies could be looked at as added labor, additional material, or additional factors related to or surrounding your project, but overall they all boil down to costs. So keep that in mind—if there are contingencies associated with the project, what you are doing is setting aside additional funds for potential costs to ensure you remain profitable should these situations occur. So, in essence, contingencies are for mitigating risks.
It's part of the estimator's job to identify what these potential risks may be or to assume what potential risks may occur. If these items don't take place such as rain delays, it doesn't necessarily mean that you return those funds to the owner unless identified accordingly. For example, it's not uncommon to have a contingency for working with a difficult client.
Historically, you may have found that it costs more money to work with a particular client and therefore you have to adjust accordingly. This could be addressed as a hidden contingency for the client—something that they don't see—where it is included in the overall cost without being itemized to the client. If you have an exposed client contingency, the client could request a credit if those conditions are not required.
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Another example could be the cost of miscellaneous work that may occur to coordinate between two major trades, like electrical and mechanical. Each one of them has their own cost and subcontract, but there's that gray area in between for coordination. So you want to set some money aside for that.
That could be identified as a contingency for coordination between the two trades. Now this is an actual cost of construction, so, therefore, it is what I refer to as a hidden contingency for the contractor—the general contractor—but not necessarily a contingency that the owner has access to. A common contingency with owners is when they say, go ahead and put in a five percent contingency for change order work.
The only issue is that the owner controls when that money will be spent. So they are in control of that contingency money, and therefore, if they do not approve any change orders to use that contingency money, they should receive that money back at the end of the project, depending on your contract agreement.
