With the new "mega projects" and governments having to lock in public dollars years ahead of construction and design-builders/construction managers having to guarantee overall project costs at 30% design, contingency has become a much more contentious issue than in the past. The delicate balance of assuring the total cost will be covered versus winning the project or getting the public vote to proceed, is not an easy task. While contingency was merely one form of the project estimate, it has now risen to the levels of senior management and even specific contract provisions.

So how does one get to the "right amount" of contingency? One way is to simply use estimating manuals and estimating standards such as those promulgated by the Construction Management Association of America (CMAA), Construction Industry Institute (CII) or the American Association of Cost Engineers (AACE). Such organizations will provide guidance as to level of estimate definition, range of estimate accuracy depending on the level of scope definition and/or contingency percent ranges. For the standard construction project, these guidelines may in fact provide the proper guidance for determining the right level of contingency. However, on complex projects or projects with potential risk factors, this method may not be sufficient.

Another method is historical project data. Of course, this requires the company to have maintained a database with sufficient project information over a number of years that would in turn provide the parameters to be evaluated in determination of the level of contingency that can be provided. However, the number of companies having a sufficient number of projects along with sufficient specific project information is relatively small. Caution should be taken if the firm only has a few examples upon which it is basing its assumptions as each project is so uniquely different that unless there is a sufficient database, the assumptions may prove to be invalid.

The most accurate method of determining contingency is to define contingency based on assessment of project risks. When guaranteeing prices and locking in dollars, it is prudent to assure that the total project costs being proposed is done on the basis of risk identification and risk assessment. While there are many ways of performing risk assessments (another topic for another day), the key is to probe the likelihood of the risk occurring and the impact to the project should the risk occur. The impact can be either time or direct cost, but both have a cost impact to the project. It is this risk assessment that then allows the project team to adequately address the issue of contingency and how much contingency should be considered in the estimate.

Obviously, the less that is known about the scope and/or design, the higher the contingency should be. However, even with defined scopes of work, depending on the type of risk and the impact of that risk should it occur, the contingency level may still be a large percentage of the total estimated price.

Key assumptions regarding the contingency level cannot be overstressed. Ownership of contingency may be treated differently depending on the contract. However, despite who owns the contingency, once the need to "dip into the contingency pot" begins to occur, questions are presented as to why it has to be used, who may be responsible and how it then affects the margin of the project. It will be at this point in time that everyone will appreciate having the assumptions available to them.

We all know contingency is a fact of life and will be included in estimates when design is incomplete. However, the age-old question of how much is enough can only be answered with the proper investigations and collaboration with industry standards.

February 25, 2007

A contingency is another form of insurance. In the case of a contractor building a project the contingency in his bid is to protect him from the unforseeable future. In Federal government contracting the argument is that a contingency belongs to the government.

To all contractors do not give up your contingency to the government. Couch it in your proposal in such away that it is an allowable item. If you do give up your contingency and if and unforseeable event happens you will be left holding nothing but the bag. In todays marketplace you may want to look at insurance to protect you in some areas. I wrote an article in 1986 for Highway and Heavy Construction called "CONTINGENCIES a What If."

Sam Isom