What Is the Purpose of Contingency?

Contingency is an amount of funds set aside in the project budget to cover the things that were missed during the design phase of a project prior to the start of construction. This amount could be set aside by the Owner or Builder, but it has to be defined at the beginning of the project as far as who has ownership of it. Owners and Builders find themselves debating about the contingency during the construction phase if the “ownership” is not clearly defined prior to the start of work.

In the case of a guaranteed maximum price, the Builder often establishes an amount to cover those items, usually very minimal, that he may have missed during the designing and budgeting portion of the project. Mistakes happen and that is why we have a contingency for just such an occasion.

When the Builder sets it aside for his purpose, the Owner technically can’t spend it. When the Owner sets it aside for his purpose the Builder can’t touch it either. Sometimes the contingency is established for use by both parties, but that is decided up front prior to the start of construction. Often times the Owner thinks they can spend the Builders contingency on change orders, but that isn’t correct. The contingency is a method of risk management to cover missed items in the budget that needs to happen on the project and not discretionary funds for the Owner to use when they change their mind about something.

When a contingency is included as part of the project, it is wise to declare the amount up front, what it will be used for and who has ownership of it. That one step will remove all doubt and eliminate the potential for disagreements later in the project regarding the contingency.

 

 

What Is A Change Order?

Everybody who embarks on a construction project tries to do all the planning they can to avoid change orders during construction. That is always the goal, but sometimes it doesn’t work out that way.

So what is a change order? A change order is simply a change in the scope of the work of the project. It occurs when the Owner changes direction regarding a portion of the project.

Let’s face it; we are a culture of people that thrive on having the latest and greatest things. When something new is introduced to the construction industry, and if the Owner wants that instead of what he is supposed to be getting, he has the right to change his mind. Or, if the Owner realized they missed something, which can happen, they make the correction before the project is completed. A change order will be issued to all parties involved so they know to change direction on the project. Without a change order, the builder does not have the right to divert from the construction documents.

Of course, change orders are more costly during the construction phase of the project because by that time many decisions have been made regarding the project and purchases finalized and sometimes products even shipped. The best time to change one’s mind is when you are in the design phase. It is much easier to move a wall on paper than after it is constructed.

Communication, Communication, Communication

The key factor in real estate decisions is location, location, location. The key to successful projects is communication, communication, communication. Ignore that key component of a project and the result is utter CHAOS! Successful project managers spend 90% of their time communicating in one fashion or another.

This day and age allows many forms of communication whether it be phone, text, email, blog, online social networking or the old fashioned hard copy letter sent via snail mail (which still works by the way).

Keeping every stakeholder in the project informed of what is happening at regular intervals is so vitally important. If the communication is lacking then the project is being ignored and not managed properly.

Communication is the backbone to collaboration on the project. Successful projects are always managed by a team that is actively involved in communicating on a regular basis with one another.

The Project Is Only As Strong As Your Weakest Subcontractor

What is one of the worst mistakes you could make on a construction project? Give up? Hire an under-qualified subcontractor. When this happens the rest of the project suffers and sometimes even causes project failure. So how do we avoid this problem?

The best advice is to come up with a project specific qualifications list for hiring vendors for the project. These qualifications are above and beyond the project specifications. Project specifications are the written requirements of the scope of work and the general contractor can use that as a means to qualify subcontractors; but going above and beyond that with additional qualifications helps to weed out those who tell you they can do the job and those who can actually do it right. Additional qualification items and practices could look like the following:

• Listing of similar project experience
• Discussing philosophy of project management and staffing
• Request past project Owner references
• Check out the company’s website – This could help answer the previous items
• And don’t forget to discuss their company safety policy!

Projects that focus on hiring contractors based on best value based on qualifications and not just amount of bid sets the project up for success.