Contingency sum

The contingency sum

In Construction Industry Terminology (Standen, 2000), a contingency sum is defined as:

A sum of money included in a construction contract sum for expenditure, if necessary, on matters unforeseen at the time of calculating the contract sum.

In many industries where production runs are normal, prototypes are made. These are viewed as investments to ensure that when production does commence most of the unforeseen problems will have been anticipated and overcome. The nature of the building industry is such that prototypes rarely apply. Each construction project generates its own difficulties which time will expose, and provision of a contingency sum is a widely recognised mechanism to allow these to be overcome.

For these reasons, building contracts usually contain provision for a contingency sum to be expended by the contractor only on the written authority of the architect. The amount of the contingency sum is dependent on the type and size of the project.

The inclusion of a contingency sum should assist the owner (and, if included in the contract, also the contractor) in assessing the realistic value of the project. The architect should recommend the inclusion of a contingency sum for most, if not all, projects.

It is important to ensure that the owner clearly understands the purpose of the contingency sum and that it should not be used for other purposes. For example, where the owner instructs a change in the contract that results in a variation, such costs should be treated separately and the contingency sum should remain intact for its intended purpose.

Architect's discretion to expend the contingency sum

The architect's discretion to use the contingency sum is restricted and all expenditure must be with the full knowledge and approval of the owner. It must be emphasised that the architect only has the right to authorise expenditure of the contingency sum when the owner's prior agreement has been obtained.

The contingency sum is normally to be used to cover the cost of incidental items that only become apparent during construction and could not be or were not foreseen when the documents were prepared. These could include variations the architect is normally permitted to authorise without prior reference to the owner, such as those arising from foundation conditions or obstructions, or minor inconsistencies in the documents.

The contingency sum in the contract

When a contingency sum is included in the contract, reference to the sum is usually included in the preliminaries section of the specification.

An example of a suitable specification clause for including the contingency sum in the contract is:

The sum of _________________ dollars ($_____) must be included in the contract price as a provisional sum for contingencies to be expended at the sole discretion of the architect and only in accordance with written instructions from the architect. If the net total of instructions for the expenditure against the contingency sum is less than the above amount, the difference will be deducted from the contract price.

When providing a contingency sum in the contract the architect should draw the owner's attention to the relevant clause of the specification and ensure that the owner acknowledges that the architect has the sole discretion to expend the sum.

The contingency sum is usually included in the contract price as a provisional sum and adjusted in the same way that other provisional sums are adjusted.

The contingency sum not in the contract

Some owners prefer that the contingency sum is not included in the contract. In such cases, an appropriate amount should be included in the owner's project budget. The architect should ensure that such amounts can be expended at the architect's discretion, as though they were included in the contract.

This preference is often intended to avoid encouraging the contractor to see the sum as notionally available for variations, and keeping the sum outside the contract avoids the contractor including overheads on the amount in the contract price which would not be recovered if the sum is not expended.

Separate contingency sums

Subconsultants sometimes include contingency sums in their documentation. This should be discouraged. All contingency sums should be clearly identified in the subconsultant's estimates and, where necessary, included as part of the total contract or project contingency sum.

It is important that the architect retains the sole discretion to expend these sums and that this discretion is not passed onto the subconsultant. As these sums will increase the total value of provisional sums in the contract and, thus, attract contractor's margins as part of the overall tender for the project, the subconsultant should be required to justify any specific contingency sums.

Amount of the contingency sum

In assessing the amount of the contingency sum, consideration should be given to the:

• type and complexity of project
• nature of the site
• nature of the owner
• quality and extent of the documentation

For new works, the contingency sum should be in the order of 3% to 5% of the estimated cost of the works. For alteration work it could be up to 10% of the cost. The contingency sum should include any amounts required by subconsultants.