Managing Project Contingency Funds (Part 2)

The old adage “a penny saved is a penny earned” is just as true when it comes to construction projects as it is your personal finances. Once you’ve properly defined your project contingency budget, it’s critical that you manage that money wisely and that it’s spent just as judiciously. That is the facility owner’s responsibility – not the contractor’s or designer’s.

Contingency funds can be exhausted quickly from a high number of change orders. The causes of change orders are almost limitless; however, most fall into one of the following categories:

• Errors and omissions in plans or specifications.
• Unforeseen site conditions.
• Owner requests.
• Advancements in technology (e.g. improvements in medical equipment that evolve over a healthcare project’s term).
• Code changes.
• A late-arriving epiphany.

While some of these are unavoidable, others can be circumvented by a solid contingency management process. With a good system in place and oversight into how the contingency money is dispersed and what it’s being used for, an opportunity to reduce costs emerges. Without this, it’s likely that some money will be wasted because you are not able to see what expenses could have been avoided.

One of our clients, Scripps Health, shared with us that they’ve established an effective contingency management process that ties into how they forecast costs – they can see how contingency is being spent, control how it’s spent, and maintain visibility into available funds.

The proper management of contingency funds on construction projects represents 1) a big opportunity for organizations to either reduce overall project costs on their future projects or 2) to get money out of existing projects. There is perhaps no better example of this than at Banner Health, one of the largest nonprofit hospital systems in the country and another e-Builder client.

“We’ve just recently gone through our active projects and gathered $70 million out of the project contingency,” says Kip Edwards, Vice President of Design and Construction at Phoenix-based Banner Health. “Capital is tight these days. We need every dollar we can find, we have a lot of needs that require funding, and this lets us fund a number of things that wouldn't have otherwise been funded right now.”

The city of Enid in Oklahoma hopes to wrap up its downtown Enid Renaissance Project with underutilized contingency. The city wants to finance renovation of its Convention Hall as part of the downtown project, but isn’t sure where funds will come from. One of the options is to refrain from spending all of the $2 million in contingency slated for the $20 million Renaissance work.

What could you do with a little (or better yet, a lot of) leftover money? As promised, check out this link to the webinar on contingency management best practices, presented by one of our clients, University of California San Diego.