First of all, remember that a project contingency is not the same as a construction contingency, which we addressed in a past blog.
Why should a project contingency be included in a project budget?
Usually when project budgets are being prepared, it is very early in the capital planning process and there are many unknowns. So to cover the risk of the unknowns, it is very typical and wise to include a project contingency.
What should a project contingency be used for?
A project contingency can be used for unforeseen and unpredictable project-related costs, errors and omissions in the contract documents, changes created by differing field conditions, costs that vary from the original budget and missed costs. A project contingency is carried for these purposes and reallocated in the budget categories including; professional fees, medical equipment, technology, FF&E (furniture) and administrative costs. Please note that the project contingency is not intended for the construction nor financing categories. However, we have seen many owners use project contingency to buy additional scope.
How do you establish how much to include for a project contingency?
There are many varying opinions on this topic but we generally recommend a range of 3% – 5%, which is based on an agreed percentage against the total amount included in the categories; professional fees, medical equipment, technology, FF&E (furniture) and administrative costs. Of course, depending on the overall magnitude of the project budget, the various project risks and the general sense of accuracy and confidence in the budget categories will help establish what percentage should be used for a project contingency.
Can the project contingency be reduced as the project progresses?
Yes, the project contingency can be reduced as the project progresses and the “unknowns” are reduced, as well as other various risks are minimized. Some of a project contingency may be reallocated or absorbed into other budget categories (as scope becomes further defined) and some can remain to cover the remaining unknowns and “gotchas” through the duration of the project. So do not always expect that the project contingency to be reduced just for the sake of reducing the overall project budget.
There is as much art as there is science in determining a proper project contingency. But there is one thing that is very clear; always carry a project contingency in your project budget. You will never regret it.