Estimating Contingency Costs

These are the costs that must be added to the initially calculated costs to take into account events that are highly likely to occur some time during the course of a project and that will affect project cost (Art. 19.1). Although the effect and the probability of occurrence of each contingency event cannot be predicted, the total effect of all the contingencies on the project cost can be estimated with a high degree of accuracy. In this respect, contingency allowances are much like insurance.
Contingency costs are usually expressed as a percentage of direct costs but they also may be expressed as a dollar amount.
These costs should not be considered a handy slush fund to compensate for inaccurate estimating. No matter how careful and expert the initial estimate, no matter how excellent the design, no matter how skilled the constructor, the unexpected is likely to occur and must be intelligently gaged in each estimate. If the contingency allowance is underestimated, all parties to the construction contract can suffer financial loss. If the contingency is overestimated, the contract may not be awarded or the client may not be able to finance the project.
Contingency should be evaluated for each estimate and will vary by project type, location, and level of estimate. A contingency cost as high as several hundred percent may be justified, for instance, for an experimental process plant, whereas the contingency cost for a prefabricated warehouse may be only 3 to 5%.
Owners contingency covers the costs that the owner could incur during the course of a project. For example, if the project is delayed for any reason, there will be additional interest charges for the financing. If the city or state changes the building code during project execution, construction costs could increase. If an important commodity undergoes a sudden price increase, the overall cost of the project could be significantly impacted.
Designers contingency covers the costs that the designer could incur during the course of a project, such as the cost of services that the designer renders and that were not originally anticipated and the additional construction costs due to changes in the design. Both types of contingency costs are illustrated in the following examples.
During the design phase, a designer finds that a portion of the structure being designed has an extremely congested area. This congestion requires changes in design of either the steel structure or the ventilation system. The steel might have to be reinforced or the ventilation might have to be redesigned. All additional design and construction costs will have to come out of the contingency funds.
As a second example, during the construction phase, the contractor learns that specified equipment has been discontinued by the manufacturer. A substitute will be needed, along with associated design modifications. Design and contingency costs needed for this modification will have to come out of contingency funds.
Contractors contingency covers the costs that the contractor could incur during the course of a project. Suppose, for example, that rain occurs while excavation for  the foundation is well under way. Water entrapped in the excavation must be pumped out and mud removed. Also, because of enlargement of the excavation, the amount of backfill required increases. The additional costs incurred must be covered by contingency funds.
Costs not normally covered by contingency allowances include: costs normally covered by insurance; substitution of better materials (should be covered by a change order); increases in project size or scope; and acts of God, such as floods, tornadoes, and earthquakes.