How to calculate contingency cost. When estimating a Budget it is usual to include an extra amount of money for unexpected costs.
Calculate Man Hours. How to Calculate Contingency Cost
The shareholders or owners of Companies are generally the ones in charge of analyzing and defining the amounts of these items.
The purpose of the percentage of additional money to be charged for these contingencies is to protect the Company, against risks not covered, in the estimation of a Budget.
In other words, it is intended to cover with these monetary items any incognita not precisely defined.
In general, the contingency reserve is added to an estimate because there is a degree of statistical certainty that unpredictable individual costs will arise.
Consequently, the amount of each contingency is set at a value that balances the risk assumed.
The amounts or percentages for contingencies that are usually added to the estimates are due, for example, to:
The Work is executed in a Region that has a calamitous climate.
When the Region in which the Work is to be executed historically has an unpredictable climatic condition due to sudden changes in temperature or intense and prolonged rainfall or possibilities of flooding, etc., the proponent should consider covering himself against these contingencies.
Possibility of labor disputes.
In some regions, unions are more radical than in others, increasing the likelihood of strikes or unusual changes in labor regulations. The Proponent must protect itself against these events.
There are regions with very unstable economic and political realities. This leads, for example, to frequent and unforeseen increases in prices or interest rates. The proponent must also be protected by this situation.
Very short construction times and high penalties.
When the Work that is quoted meets the conditions of having to be executed in a very short period of time and with onerous fines for non-compliance with the term, it is reasonable to cover that situation with items for unforeseen events.
Designs not fully defined in the bidding documents and/or possible scope errors therein.
This situation produces uncertainty and the need to cover that contingency.
Long-term works or projects.
For long term works, in general, payments are adjusted with a price readjustment formula due to salary increases and material costs in the time.
The analysis of the effectiveness of this readjustment formula shows whether or not there is a need to make additional provision for costs not covered.
In summary, the estimates should include adequate reserves to protect against possible economic damage caused by the occurrence of unforeseen events.
How to Calculate Contingency Cost | Calculate Man Hours