A carefully managed contingency is your best tool to control exploding budgets.
Here’s the broad view. Early estimates are not very reliable and should carry a significant contingency. As each phase is completed, estimates are more reliable, and costs always go up. Because of improved reliability, contingency may be reduced. The goal, of course, is that the overall budget remains the same. Getting there is the art of budget management. See: Contingency Breakdown
How much should contintency be? Often, in early stages, you see people using a nominal 5% or10%. That’s not enough. To put it in context, when the construction begins and there is a firm construction contract, that is when an owner should be carrying a construction phase contingency of from 5% to 10% or even more
Early project contingency can easily be 25% or more, but a single number like this doesn’t seem reasonable to many. As a matter of communication, contingency needs to broken down into it’s constituent parts and the risks that it represents explained.
So, what are those risks? Here are some of the areas of risk that impact construction cost prior to the start of construction
- Project scope not identified – Especially early on, neither the arhitect or the contractor can fully appreciate the details of construction necessary to implement an evolving design concept.
- Unknown or hidden existing conditions – On any site, especially when there are existing buildings or infrastructure, there will be many hidden or unknown conditions which may not be fully appreciated until construction starts.
- Incorrect estimates – Even with the best efforts, estimators’ analyses and assumptions based on incomplete documents result in the inaccurate estimate.
- Scope added by Owner – You think you know what you want and you swear that you’ll hold the line on costs, but as a project evolves, even the most prudent owners add to the scope of the project.
- Unanticipated government requirements – The design team attempts to anticipate requirements and fees of planning and building officials. However, they are never definitively known until final permits are issued at the start of construction.
For more detail, see: Contingency Breakdown