Why is a Construction Contingency Fund Needed?

by | Oct 5, 2023 | Project Management, Topics | 0 comments

Construction Contingency Fund is established to facilitate management of costs related to changes that occur during construction.  Rarely are projects constructed without any change, almost all of which involve an increase in the contract price.  Experienced and technically cognizant Clients recognize this and establish a contingency fund right from the beginning.  They accept that neither they nor the Consultant are perfect and therefore will not be able to foresee everything that will occur during construction.  However, less experienced and some more difficult Clients may be unaware of the need for or unwilling to accept this premise.  When changes or additions are found to be needed for whatever reason, the latter group is prone to allege that a design deficiency has occurred and look to the Consultant to pay for the change or addition, triggering a professional liability claim.  The following are considerations regarding having a construction contingency fund:

  • The existence of a construction contingency fund is an acknowledgment that the Client agrees that there will likely be a need for one.  Without one, the relatively simple activity of accomplishing a change or addition to the project will be made significantly more complex by having to deal with identifying a funding source.
  • In the absence of a construction contingency fund, some Client project managers are resistant to presenting a request for additional funding to their political board or investors.  They fear being viewed as weak or inadequate for not having anticipated the possible need for the change or addition.  To overcome this problem, they may resort to looking to the proceeds of a professional liability claim as the funding source.  This can begin a time, energy, and money consuming activity that could have been avoided.
  • The management level at which access to the construction contingency fund can be made should be at the lowest level consistent with the complexity of the project.  Frequently there is a monetary limit above which access to the contingency fund must have the approval of the next higher Client management level.
  • Similar reasoning can be applied to having a contingency fund related to the design process.

Early educational effort with Client regarding the need for a contingency fund can pay big dividends during execution of the design or during construction.

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Lowe Consulting, LLC
John M. Lowe, Jr., P.E.
Happy Valley, OR