Small to Medium Contractor Contingency and Assumption of Risk

Abstract

This paper is the result of an investigation into the use of contingency in smaller construction firms. It summarizes recent literature classifying construction contract risks and mitigation measures. Eight major classifications are used to organize the types of risk found in the literature. The risks are described in detail with associated risk mitigation strategies. Risk modeling techniques are briefly reviewed for their contribution to the risk categorization and contingency estimating. After reviewing the researcher's concepts of risk management in the literature, interviews were conducted with estimators and/or construction managers involved in the bidding process at 12 small to medium construction firms. The purpose of the interviews was to investigate the current risk management practices of small and medium size construction firms. The times when smaller companies used contingency had specific interest for the research. The literature findings were compared with important risk factors identified from the interviews. The main conclusion drawn from the comparison was that small to medium size contractors predominately use contingency in those situations where they are construction managers in a reimbursable contract. Generally, they do not use line item contingency in competitive bidding situations. Thus, these firms are assuming proportionally greater business risk than suggested by the literature on contingency.