Samantha Schact, Katesha Long and Josh Levy | Construction Executive
This is the second article in a three-part series on construction contingencies. The first article is The Best Laid Plans: Contingency in a Construction Contract.
WHO CONTROLS THE CONTINGENCY?
Construction contingencies can be an excellent tool to help plan for the unexpected on construction projects, but only if the project stakeholders are aligned on how the fund should be used and who controls the use of the contingency funds. Determining who should control the contingency and how the contingency should be used are topics that are the frequent source of disagreements, and even disputes, between owners and contractors. While two primary schools of thought exist—with contractors siding with one approach and owners siding with the other—there really are no right or wrong answers to these questions. However, like many project decisions, there are benefits and drawbacks to each approach.
Generally speaking, contractors prefer to have broad discretion to use the contingency fund for anything that is considered an allowable cost, without the need to obtain owner approval of the use of the contingency fund. This approach is beneficial, because it enables the contractor to freely move money from the contingency line item to other line items as overages in other line items occur without the delay. If every charge to the contingency fund requires owner approval, the parties can get bogged down with paperwork for minor cost items that likely are not controversial. In today’s world where every project seems to be fast-tracked, the benefit to the owner of closely monitoring a fund that the is designed to make up for potential gaps in the contractor’s budget due to a variety of causes may be outweighed by the benefit of a contractor’s discretionary use of contingency. The relaxed oversight can help to keep the work moving and foster the spirit of cooperation.
On the other hand, the contingency fund is the owner’s money. Margins in project budgets are often razor thin, and perhaps there is no other fund to draw from once the contingency fund dries up. In that case, the owner may determine that it is critical that it has the ability to exercise strict control over this fund to ensure that it does not become a contractor mistake fund. Even if money (or the lack thereof) is not the most critical concern, for some owners the idea of paying for costs such as subcontractor defaults and estimating mistakes is not consistent with the perceived responsibility of the contractor to bear the risk of these kinds of losses. In this case, the owner may want to approve all charges against the contingency fund before they are made or establish strict guidelines over what kinds of costs the contractor can charge to the fund.
Ultimately, there is no “one size fits all” approach. Determining who should control the contingency and what costs can be charged to the fund will be a project-specific determination and will depend on the needs of the project and views of the project participants. A collaborative approach will take into consideration common contingency use issues such as the completeness of the design, the potential for adverse weather, the risk of material shortages or delays and the myriad other challenges projects face every day. It is critical that the parties work through any disagreements over how the contingency fund should be controlled and spent before starting the project and clearly set forth the rights, duties and responsibilities of each party with respect to this fund in the construction contract.
Part III of the series will lay out the primary drafting considerations for contingency clauses in construction contracts.