Contingencies

 

Project cost management is one area where you can make major improvements to your projects.

This approach uses a cost model as a financial planning tool to help you to understand project cost constraints. In a process similar to the program estimating support used by agency construction managers, you create a cost model for the project. When used collaboratively, cost models are highly effective tools for controlling project outcomes. The goal is to create a model, which includes cost placeholders for all anticipated costs in the project. The cost model then becomes the objective measure of financial success for the project.

At the outset of a project, it is unnecessarily expensive to negotiate costs that encompass every conceivable service that might be required as the project proceeds. The best solution is to carry contingency funds. This gives you more flexibility to make changes without renegotiating or amending contracts. Changes such as revising the project scope, amending prior decisions, providing updated information, extended schedules, expanding services, or adding additional consultants become easier to handle when managed within a budgeted contingency. By streamlining the need to negotiate additional costs, you minimize the need for uncomfortable situations that can jeopardize the owner's relationships with the team.

It is difficult to determine ahead of time the precise scope of every item in the project. In simplest terms, the goal for any cost management program is to eliminate (or at least minimize) uncertainty. Completely removing uncertainty is not possible, so you establish contingencies. The contingency is not the only tool that you use to manage costs. Management of the costs in any project relies on many other factors to help prevent costly changes:

  1. The project needs to start with a realistic schedule. When there is schedule uncertainty or an extended schedule, there are always added costs.

  2. The project should include a comprehensive programming effort. Understand the design before proceeding into the production phases. A clear design and clear communication of the design is the owners best tool for controlling embedded ‘fudge-factors’ in bids.

  3. By their very nature, documents will contain some errors and omissions. Producing a perfect set of drawings and specifications has yet to occur. No human has yet achieved perfection, no matter how skilled or how high of a fee it is paid.

  4. Current site surveys and soils reports should be in-hand.

  5. Financing terms should be locked-in or a separate allowance for added costs should be included.

In order to manage these and many other factors, contingencies are included in the cost model. The contingencies are established using professional judgment and historical precedent. They cover some changes, not every conceivable one.

Managing additional costs for legitimate changes must be as easy as possible. Confrontation costs money. With institutional owners, the contingency eliminates the need to obtain repetitive formal approvals―a huge barrier for many project managers―since you have already encumbered the funding. Including contingency funds in your project budget, is a far better way to manage costs than taking the adversarial approach. In the final analysis, a contingency fund will help you to receive a better product and avoid needless headaches and legal wrangling.

Scheduling and phasing factor into the contingency. The team's understanding of phasing and the project's schedule are included in the cost model. Rather than inflating the costs in the model to allow for unknowns and potential problems, you establish contingencies to manage uncertainty. You manage the project within the constraints imposed by the contingencies.

Some people have unrealistic expectations about project costs. These expectations often result in conflict and confusion. This has proven to create additional costs and can result in unexpected project problems. Some of the unrealistic expectations that occur include:

  1. The belief that: "Once you sign a contract, you should provide whatever services are required. Whether included in the project scope, or not.”

  2. The belief that: “You're the experts and I relied on your knowledge of which services should be required when we negotiated your fees.”

  3. The belief that: Sharing project data with other stakeholders on behalf of the project will avoid conflict or controversy.

  4. The belief that: It is possible to refuse to part with more money regardless of the cause.

Keep your expectations realistic. Realize that even with the best of intentions and the highest quality process, changes will happen. Plan for them and you will find that your projects go smoother. Use contingencies and a realistic budget to manage better.

Contingencies fall into three broad categories. As your project moves from step-to-step, the contingencies evolve to give you the flexibility to react quickly and effectively to changes. Contingencies are best budgeted during the validation process of your project. They are a project cost, just like everything else in the project. Once you review the budget and encumber the funds, the contingencies normally go through the following process:

  1. 1.Design Contingency. Assuming that you start with a validated concept, you have a clear idea of where your project is going. As your project moves from design through production and bidding, the contingency serves to manage ‘design creep’ allowing you to add or remove cost items as you learn more detail about your project. Without this flexibility, either the project must, exactly follow the validated concept, or at bid day, the bids are likely to be very different from the original budget.

  2. 2.Construction Contingency. Change orders during construction are inevitable. Most contractors expect additional money for every slight change, whether such changes result from errors, substitutions, unexpected site conditions or owner-initiated changes. During construction, the contingency fund sets aside a portion of the budget, either a specific dollar amount or a percentage of the budgeted construction costs to pay for the costs associated with the imperfect nature of the process.

  3. 3.Project Contingency. Beyond design and construction related changes, you should also budget for other unexpected costs. The most common project changes include: schedule delays; changes in agency requirements; programmatic changes; owner-initiated design changes; unknown site conditions; unexpected construction cost escalation; added financing costs; and additional professional fees. Construction operations, market conditions or other factors may drive these costs.

As your project progresses, the contingencies will go up and down as you react to day-to-day needs and decisions. Manage the contingencies to give your project the best chance for finishing on budget and on time. Use your contingencies as the objective measure of financial success.