When it comes to construction contracts, there are a lot of technical terms that can be confusing for those not familiar with the industry. One of these terms is “contingency”. In simple terms, a contingency is a set amount of money set aside in a construction contract to cover unexpected costs that may arise during the project.
Contingencies are an important part of any construction project as they help to manage risk and ensure that unexpected costs can be covered without disrupting the project timeline or budget. In this article, we’ll take a closer look at what contingencies are, why they are important, and how they are typically included in construction contracts.
What is a Contingency in a Construction Contract?
A contingency is a set amount of money that is included in a construction contract to cover unexpected costs that may arise during the project. This can include things like changes to the scope of work, unforeseen site conditions, or delays caused by weather or other external factors.
It’s important to note that contingencies are not the same as allowances. Allowances are specific amounts of money set aside in the contract for specific items or materials that have not yet been selected. Contingencies, on the other hand, are set aside to cover unknown or unexpected costs that may arise.
Why Are Contingencies Important in Construction Contracts?
Construction projects are inherently risky and unpredictable, with a wide range of factors that can impact the timeline and budget of a project. By including a contingency in a construction contract, both the owner and the contractor can manage this risk and ensure that unexpected costs can be covered without disrupting the project.
For owners, a contingency provides peace of mind knowing that unexpected costs can be covered without having to renegotiate the contract or delay the project timeline. For contractors, a contingency helps to ensure that they are not left covering unforeseen costs that were not accounted for in the original contract.
How are Contingencies Included in Construction Contracts?
Contingencies are typically included in the “general conditions” section of a construction contract. This section outlines the basic terms and conditions of the contract, including how changes to the scope of work will be handled, how payments will be made, and how disputes will be resolved.
The amount of the contingency can vary depending on the type and complexity of the project, but is typically set as a percentage of the total project cost. For example, a contingency of 5% on a $1 million project would be $50,000.
It’s important to note that contingencies are not intended to be used as a cushion for the contractor to pad their profits. Instead, they are intended to cover unexpected costs that are outside of the contractor’s control.
In conclusion, contingencies are an important part of any construction contract as they help to manage risk and ensure that unexpected costs can be covered without disrupting the project timeline or budget. By understanding what a contingency is and how it is included in a contract, both owners and contractors can work together to ensure the success of a project.