Budgeting Owner’s Construction Contingency

Abstract

This paper attempts to find ways to reduce an owner’s construction contingency budget such that just enough contingency is allocated that will allow the owner to deal with uncertainties but at the same time not tie up valuable funds that can be used for other activities. It is suggested that the common practice of allocating a fixed owner contingency (e.g., 10% of the contract value) to all projects contracted out by an owner is not appropriate. Instead, a methodology is proposed whereby the owner (1) analyzes historical project data; (2) identifies the line items that are problematic; (3) takes the necessary measures at the preconstruction stage to streamline these line items with respect to site conditions, time constraints, constructability issues, and project scope; and (4) finally budgets contingency funds based on this information. A case study was conducted to analyze the contingencies budgeted and actually spent by an owner in nine parking lot projects. The findings indicated that a systematic approach such as the methodology proposed in this paper is likely to minimize the owner’s contingency budget.