Contingency Management for Construction Projects

Dr Rupert Booth
Funders are naturally keen to avoid additional calls for funds in the event of project overspends. In some circumstances a request for funds is justified, especially where the cause is outside the control of the delivery agency.

However, if tight budgetary control is to be exercised, funders need a robust means of confirming that the contingency levels proposed by delivery agencies are reasonable.

Tight budgetary control also requires well-defined project baselines, defining the scope of work and its schedule and costs. If these do not exist, they need to be created. Precise definition of the financial and administrative procedures to be used by the funder and agencies must also be outlined.

Tight budgetary control also requires well-defined project baselines, defining the scope of work and its schedule and costs. 

Finally, contingency management needs to be integrated by change control and authorisation processes, with the funder participating in changes that significantly increase costs. While these processes typically exist within agencies, there may be no formal working process for the funder to be involved in the management of change.

Total contingency

Finding solutions

Faithful+Gould demonstrated our expertise in this field during a recent commission for a Middle Eastern finance ministry, which was seeking a proven method for controlling project variances. Our aim was to:

  • define a means of setting contingency levels for projects and programmes
  • compile a comprehensive risk register, identifying possible causes for time and schedule variances
  • allocate risks, based on controllability, to four levels in the supply chain: contractor (as defined by contract), project manager (for project-specific risks), programme manager (for programme-wide risks) and funder (where additional funds are required)
  • define in detail which risks can lead to a claim for increased funding and which cannot

Delivering solutions

The baseline for the project cost was the bid price, i.e. a floor level for project cost. At project level, a contingency was added to reflect the project’s level of risk. Ideally this would involve a statistical analysis and be set at the median expected cost. In practice statistical models are often unavailable, so a simple classification of risk as high/medium/low was adopted, and then using realistic, percentages for contingency based on previous experience.

Moving up a level, the programme level contingency was set to reflect risks that could affect the entire programme. This could be zero, assuming that the positive and negative uses of the project contingency were expected to cancel out, or it could be a positive value to reflect any risks affecting every project within the programme. The sum of bid price, project contingency and programme contingency then determined the budget value. A funder’s contingency was added to reflect the expectations of request for additional funds arising from more unlikely events.

At project level, a contingency was added to reflect the project’s level of risk. 

The risk register was compiled from research on the cause of cost and schedule over-run in the region, referencing in-use risk registers in the region, and thus ensuring no major risks were omitted.

The responsibility for risk was then allocated to the four supply chain levels (contractor, project manager, programme manager and funder). In some cases responsibility was clear-cut; in other cases the allocation of a risk to a party was conditional on a specified external factor.

Finally we focused on the critical interface between the agency (responsible for project and program risks) and the funder (where additional funds would be required). A detailed breakdown of risks, coupled with the external contingency factors, was prepared. This defined and recorded, in a simple table, which organisations would bear the cost of the risk. This was based on prior experience of major global programmes.

Client benefits

The primary benefit was tighter budgetary control, with each party having clarity on where budgetary responsibility for variances would lie. The delivery agency was deemed responsible for those variances allocated to projects and programmes, and was aware that adverse variances would have be met from future budgets, to contain capital expenditure within multi-year targets.

This benefit was especially important for the finance ministry who wish to minimise additional calls on the state budget in times of low oil prices.