How to Calculate Contingency Reserve.
Owners or Company project managers analyze and defining contingency reserves.
In the construction industry, a contingency is a future event that can happen and is potentially negative.
Therefore, contingency reserves are sums of money that are added to a bid estimate to cover these uncertain events…
In the following figure we highlight contingency forecast, which is analyzed in this post.
Normally we add contingency reserve to an estimate when there is some degree of statistical certainty that unforeseeable individual costs will be incurred.
Consequently, the among of each contingency is set at a rate that balances the risk accepted.
The amount of money he added to estimate for contingencies may be caused by one or more of following occurrences:
The Construction Site is in an Area with an Unstable Climate
The bidder shall cover contingencies when the project is to be affected by:
- Temperature extremes.
- Intense and prolonged rains.
- Potential floods.
- Frequent wind, etc.
Contingency Reserve – Potential Labor Disputes
In some regions, unions are very radical.
Therefore, this situation increases the chance of strikes and changes of labor regulations.
in short, the proponent must cover against these events.
The Project will be Executed in a Region with Low Legal Security
There are regions with very unstable economic and political realities.
So, this causes, for example, frequent and unforeseen increases in prices and interest rates.
Therefore, the bidder must protect itself from this situation.
Tight Project Schedules and High Fines for Failures to Comply
When the project to be quoted has:
- A short delivery time.
- Heavy penalties for failure to meet the deadline.
Therefore, it is advisable for the bidder to cover this situation with contingency items.
Designs not Defined or with Scope Errors in the Bidding Documents
This condition produces uncertainty, and therefore the need to cover this contingency.
Contingency Reserve – Long-term Projects
In the case of long-term projects, payments are adjusted by a readjustment formula that considers the increase of salaries and materials.
For such cases, the analysis of the adjustment equation will indicate whether it is necessary to cover costs not contemplated by the formula.
In conclusion, the above summarizes what needs to be evaluated to determine the contingency reserves for a project.
Check out the upcoming article on how to Calculate Profit Margin in a Construction Project.