What is a construction contingency?
A contingency is money held for what the budget cannot see yet. How much of it gets spent depends on how many unknowns the project still carries.
What is a construction contingency?
A construction contingency is an allowance in a project budget for costs that cannot be identified when the budget is set, such as ground conditions, design gaps, weather delays and price movements. Lenders test it closely because it is the buffer between a cost overrun and a funding shortfall. Fewer unknowns at the start leave less for it to cover.
A construction contingency is an amount set aside in a project budget for costs nobody can identify yet. It sits apart from the builder's margin and from the price of the work itself, and it is held for the risks that remain once everything that can be priced has been priced.
Every development feasibility carries one. How it is sized says a lot about how much the project still does not know.
What it covers
A contingency is drawn when something costs more than the budget allowed and nobody could have priced it at the start. On a building project the usual causes are ground conditions found during excavation, gaps or clashes in the design, delays from weather or late approvals, and changes in the price of materials and labour.
Some of these are design risks and some are construction risks. A budget often holds a separate design contingency in the early stages, and it shrinks as the drawings are completed and the unknowns turn into priced items.
Why lenders test it
A financier funding a construction loan is exposed to one outcome above all, which is the project running out of money before it is finished. The contingency is the buffer between a cost overrun and a funding shortfall.
So the lender, and the quantity surveyor acting for it, will test whether the contingency is realistic for the risks the project carries. A contingency that looks thin against a long programme or an uncertain site is a question the developer has to answer before the facility is agreed. The lender's wider view is set out in what de-risks a modular project for a financier, and how the loan is drawn on a modular build is in how is construction finance drawn on a modular project.
Time is a cost risk
Many of the items a contingency covers are caused by time. A longer programme gives weather more days to interrupt the work and prices longer to move, and every extra month keeps finance drawn while it happens.
When site preparation and module fabrication run in parallel, the programme can be reduced by up to 60 percent, and the period the contingency has to cover shrinks with it. Weather is a smaller risk when most of the building is made under cover, as covered in weather and programme risk.
Fewer unknowns to carry
The other way to protect a contingency is to remove unknowns before work starts. Three things do most of that work on our projects.
Construction input during design finds buildability problems while they are still lines on a drawing. One accountable party for design and construction means there is no gap between two contracts for a cost to fall into. And the site, the ground and the planning pathway are tested at feasibility, before the budget is fixed.
What it means for the feasibility
Cost certainty comes from reduced delays and controlled site overheads. A project that carries fewer unknowns gives its contingency a better chance of surviving the build, and gives its lender fewer questions to price.
How a shorter programme flows through the rest of the numbers is set out in how Hybrid Volumetric Modular changes a development feasibility.
MADEmodular / MADEbetter.
MADEmodular / MADEbetter.