Contingency and the Risk Register
Contingency, the budget line that the complex urban development Michael Stern describes as his subject depends on more heavily than any other, is money carried for costs that are expected but not yet defined, and it has a life that runs from the day a project is programmed to the day its final change order is closed. A preconstruction glossary puts the definition plainly: contingency exists because no estimate can price what has not been designed or discovered yet, and an estimate without it is systematically low rather than more precise.2 This page follows one project’s contingency forward in time, from a large early percentage to a small released balance, and sets beside it the risk register that explains what the money is for.
Predesign: the largest number, for the largest unknowns
At the start almost everything is open. An Iowa architecture firm lists what its clients do not yet know at predesign: the kinds of spaces needed, the sustainability goals, the level of finish, material prices, site and soil conditions, the state of an existing building if there is one, and the likelihood of price increases.1 Its design contingency at that stage is 20 percent of construction cost. As the architect learns the project the number steps down, 15 percent at schematic design, 10 at design development, 5 at construction documents, and the estimate becomes correspondingly more exact.1
The percentage is a proxy for definition, which is why it tracks the estimate classes described in the cost estimating entry. The AACE classification rests on the principle that estimate quality is determined by the maturity of project definition available to the estimator, and its five classes are ordered by how far the design has progressed.6 A Class 5 estimate and a 20 percent design contingency are two statements of the same fact.
One firm's contingency through the phases
- Predesign, 20 percentProgramming, finish levels, site and soil conditions and market direction are all open.
- Schematic design, 15 percentThe spaces are known and the extent of the work is coming into view.
- Design development, 10 percentSystems and materials are being selected and the estimate tightens.
- Construction documents, 5 percentDrawings and specifications are nearly complete.
- Bidding, 5 percentThe design contingency becomes a bidding contingency against bid day surprises.
- Construction, 5 percentHeld for change orders from owner requests, document errors and site conditions; 7 to 8 percent on a renovation.
Not every practice uses the same figures, and the spread is itself informative. A second architecture firm gives lower typical ranges: design contingency of 5 to 10 percent of construction cost, construction contingency of 3 to 5 percent and an owner’s contingency of 1 to 5 percent, with the instruction that percentages should be established at the start of design from project type, complexity and risk profile and should fall as details firm up, since early unknowns shrink but risks never disappear entirely.3 Where the two firms agree is on direction and on the need to document every draw.
Design development: the register appears
Somewhere in the middle of design the single percentage stops being enough, because the question changes from how much to for what. That is the point at which a risk register earns its place. A cost consultancy describes the register as the starting input to a Monte Carlo simulation: every known and unknown risk is listed, each cost related risk is given a value and a likelihood of occurring, each is shaped into a probability distribution from historical data and industry experience, and software then samples the whole set thousands of times to show the chance of each outcome.4
Monte Carlo on a development budget
- List the risksA register of known and unknown risks, each with a value and a likelihood of occurring.
- Shape each oneHistorical data and experience give every risk a probability distribution instead of one guess.
- Run the simulationSoftware samples the distributions thousands of times.
- Read the resultsThe output is the chance of each outcome, so a target can be judged against a probability rather than a hope.
The consultancy is equally clear about the method’s limit. Its greatest strength, the ability to carry a range of values for every input, is also its weakness, because the outputs are only as good as the inputs, which is why it recommends running the analysis alongside the advice of experienced quantity surveyors rather than instead of it.4 A register does something a percentage cannot: it names each risk, so that when one is resolved the money attached to it can be released rather than left to drift into general use.
Construction documents and bidding: contingency becomes a line
By the time drawings are complete the design contingency has done its work, and the Iowa firm describes it turning into a bidding contingency, typically 5 percent, carried for the surprises a bid day can bring: late material price increases, other projects bidding at the same time and thinning the field, or a miss in the estimate itself.1 What narrows those anomalies is the subject of the bid dispersion entry.
An estimating consultancy’s guide to what goes where in a bid draws the distinctions that keep contingency honest at this stage. Contingency is for risks that are real but cannot yet be priced in detail. An allowance is a fixed amount set against a product that is in scope but not yet chosen, such as light fixtures or door hardware, adjusted once the choice is priced. An alternate is a separately priced option the owner can accept or reject.5 The guide’s standing advice is never to hide contingency inside line items, because a padded unit cost cannot be seen, cannot be defended and is quickly struck out, while a visible contingency line can be discussed and justified.5
Three lines that are often confused
| Contingency | Allowance and alternate | |
|---|---|---|
| What it covers | Risks that are real but cannot yet be priced in detail | An allowance is a fixed sum for an item in scope but not yet selected; an alternate is a separately priced option |
| How it is set | A percentage of cost, higher when documents are incomplete or the work is risky | A stated figure with its basis, or a priced change against the base bid |
| Who controls it | Whatever the contract says, including what happens to money left over | Adjusted up or down once the selection is priced; accepted or rejected by the owner |
| Where it sits | Its own visible line, never hidden inside unit costs | Listed individually below the direct cost |
Construction: who holds it and who draws it
Once work begins the contingency divides by holder. The glossary describes a construction contingency often held by the contractor inside a guaranteed maximum price for coordination gaps and minor unforeseen conditions, and a separate owner contingency outside the contract for owner driven changes and unknown site conditions, with the contract defining how each is used and reported.2 The Iowa firm’s example is a limestone outcropping the soil report missed, paid for by a construction contingency it sets at 5 percent on new work and 7 to 8 percent on a renovation, where the unknowns are greater.1
The same glossary names the ways the money goes wrong in this phase: carrying the same percentage at every stage, double counting risk already covered by an allowance, using contingency to absorb scope the estimate simply missed, and letting it become a slush fund with no record of what drew it down.2 Time has its own contingency. A scheduling consultancy notes that a contractor may build a buffer between its likely completion and the contractual completion date, a time contingency the industry calls internal float, and that who may draw on it is decided by the contract’s wording, with the Society of Construction Law protocol holding that unless the contract says otherwise the float belongs to the project.7 The schedule float entry takes that question further.
Close out: retiring the risk
A contingency is retired the same way it was built, one risk at a time. When the excavation is complete the soil risk comes off the register and its share of the money is released. When the facade mockup passes, the envelope risk follows. The second architecture firm makes the point that a project which never needs its full contingency has succeeded rather than overplanned, and that the money left is a sign the risks were named well enough to be avoided.3 On a building with few precedents the register starts longer and the percentages start higher, and the discipline is the same: a visible line, a named reason for every dollar in it, and a date on which each reason stopped applying.
