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…
Table of contents
- Image with the Steps to Follow to Estimate a Bid
- List of Contingencies to Review
Image with the Steps to Follow to Estimate a Bid
In the following figure we highlight contingency forecast, which is analyzed in this post.
List of Contingencies to Review
Normally we add contingency reserve to an estimate when there is some degree of statistical certainty that it will incur unforeseeable individual costs.
The amount of funds allocated to each contingency is a value that balances the accepted risk.
In a project, contingencies occur because of the occurrence of one or more of the following events:
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.
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, these causes, for example, frequent and unforeseen increases in prices and interest rates.
Therefore, the bidder must protect itself from this situation.
Tight Project Schedules with High Fines for Failures to Comply
When the project to quote has:
- A short delivery time.
- And additionally heavy penalties for failure to meet the deadline.
For that reason, the bidder must cover himself against possible losses.
Designs not defined in the tender
This condition produces uncertainty, and therefore the need to cover this contingency.
Long Term Projects
In case of long-term projects, the client adjusts the payments by means of an adjustment formula.
This formula takes into account, the increase in salaries and materials.
For such cases, the analysis of the adjustment formula will show whether it is necessary to cover costs not contemplated by the formula.
In conclusion, the above outlines what needs to be evaluated in order to quantify contingency reserves
Check out the upcoming article on how to Calculate Profit Margin in a Construction Project.
How to Calculate Contingency Reserve – Calculate Man Hours