IF YOU SEE THIS IS IN YOUR CONTRACT, YOU’RE ABOUT TO GET SCREWED…

For me, it’s the worst word in contracts and construction estimating. If you see this, for me this is a giant red flag. I HATE, absolutely HATE blanket CONTINGENCIES. Now I know, smart people will call me an idiot, I’ll probably get obliterated online for this, but hear me out til the end, and I KNOW I can convince you to come to my side of the fence.

Contingencies

What is a contingency anyway? The online dictionary defines it as: “a reserve amount of money built into a project budget to cover unexpected costs that arise during the work. It's essentially a financial cushion for dealing with unforeseen circumstances.” Okay, that’s fine, but let’s break it down a little, and see where things go wrong for me. A reserve amount of money? Ok. For what? To cover unexpected costs that arise during the work. This is where things get dicey for me. Having spent years estimating projects, I can safely say that the building process, while outwardly complex, is actually quite simple. The building process is predictable. What is unpredictable are people. People are the wild card, the lurking variable. People are pretty much what make contingencies necessary for most projects to “stay on budget.” The key phrase I have an issue with here is “unforeseen circumstances.” Too often, I see builders dump between 10-15% of the TOTAL PROJECT COST into a contingency fund, because you “just never know.” Guess what? You do know. We have drawings and specifications that tell us what is being built in fact. Unforeseen circumstances are the kid seeing dead people in the 6th sense, unforeseen is Will Smith slapping Chris Rock at the Oscars. Too often what is categorized as “unforeseen” can be chalked up to laziness, or even worse, greed.

Laziness

First, the laziness bit, that’s a word that will make a construction worker’s hair stand on end. Talk about my mother if you must, but don’t call me lazy. What I mean here, is that in new construction, all aspects of the build are laid out in the drawings. If the drawings aren’t clear, don’t start until they are. Once they are clear, we estimate using our SMEL test. The SMEL test examines every cost code in the estimate through the lens of Subconstract, Materials, Equipment and Labour. Take a cost like drywall. First the builder determines if the task will be subbed out or done by their own forces. If it’s going to be subbed out, the builder gets a quote based on the drawings, gets a firm price for it. That price is entered into the Drywall line under Subcontract. Next, the builder determines if there are any additional material costs to be added. If not, they move on to Equipment. This column drives a question. Will the drywallers next any equipment that they are not providing themselves? Do they need scaffolding to get to high ceilings? If so, who is providing this? If it’s the builder, rental costs should be determined, and entered into the line under Equipment. Next is labour, is the builder supplying any labour for the drywallers? If yes, the labour cost is entered in. ONCE the SMEL test is complete, we have our total cost, and we’ve thought about all sides of this cost code.

Where the laziness occurs, is when the builder gets a quote for drywalling, and enters that value into the estimate, and never thinks again about further cost implications. Then the drywallers show up on site, builder has to go rent them scaffolding, and now we have an overage in our budget. BUT WAIT!!! We don’t have the overage, we can hide it in the huge blanket contingency that we have!! Now I understand that the scaffolding is going to cost the client in both scenarios, but the idea that a contingency can be used for lazy/bad estimate is terrifying to me, because I’ve seen so many extraneous costs buried in the contingency like a time capsule no one will dig up. Carpenters took 30% longer to form the foundation? Toss it in the contingency, and we’re still on budget. Someone forget to add crane time into the budget for the big beams? Throw it in the contingency. I once did an estimate for a company, and he gave me their estimate file, which had a previous project in it. I saw the 10% contingency on a million dollar build, and asked how the build went. He said “great, we finished on budget, well we used $70k of the contingency.” $70k over is still on budget??? We can do better…

I know so many builders are stretched too thin, being on the tools and quoting/estimating at night, and I sympathize with them. But their clients deserve better.

Greed

Secondly, the greed bit. Depending on the contract structure, the builder may be charging fees on the estimated cost of the build. Therefore, the higher the estimated cost, with contingency included, the higher the builder’s fee. That seems misaligned, doesn’t it? Does the builder give back the fee if the contingency isn’t used? Never seen that.

At the time of estimating, there can be many unknowns, and there can be few. As an estimator, I want as few unknowns as possible. If your builder wants to start because they have a window that works for them, but there are still a lot of unknowns, tell them to wait. If they say we can’t wait, find another builder, you’ve avoided yourself some major headaches, and your future self says thanks. Your estimate should have as much cost certainty as possible. That may mean that you the client will have to make a bunch of decisions prior to the build starting, but believe me, that’s so much better anyways.

There are precious few true uncertainties in construction. Excavation is one of them. I always caveat that we don’t know what is truly beneath the surface of the building lot, so if there is a budget overage, we will let you know as soon as possible. Where possible, test pits can be dug to get a sense of the material also.

Some may say “but Aaron, what about weather events, those are unforeseen!” To which I say yes, you are correct, how likely are they? If you’re building through the winter in a northern climate, could you carry some cost in Cold Weather Measures cost code? Could you add 30% onto your labour cost code knowing the workers will work slower? I am not against having foresight and adding insulating costs where applicable, that is being wise. Too often “unforeseen circumstances” are an excuse for incomplete estimating, or poor foresight. Adding 10-15% blanket contingency is wrong in my opinion. Use that SMEL test, think about all sides of your project, and you’ll see contingencies shouldn’t be required for a builder willing to do the work.

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Thanks for reading…