Larry Goshorn, President

Boards, COCs and the public all expect stability. With regard to a building program, stability means keeping the bottom line of your project budgets from changing. Achieving this stability requires an understanding of the use of project contingencies — something that cannot be taken for granted.

A 2007 public report from a bond advisory group recommended that project contingencies being used in planning budgets should be lowered. A school builder was quoted: “If I can’t estimate the cost of a school within three percent, fire me!”

• The report also cited +35% inflation in construction costs in the prior three years and chose to ignore the fact that the planning budgets (which had 10% contingencies) were developed four years previous.

If budgets were developed after approved plans are available, I might agree. However, that is not the case — budgets are established prior to hiring an architect. Of course, there are exceptions (usually indicating a broken budget process): the LA Times documented millions of dollars wasted in the process of designing local community college projects for which there was no funding to actually build.

A standard presentation in construction management contains the chart (below) which plots the ability to impact the cost of a construction project.

The way to maintain the bottom line of project budgets is to manage the project contingency in correlation with this chart — you need a larger contingency prior to design. As your plans for the project become more detailed (as you learn more about the project), your unknowns are fewer and your contingency can be smaller. By the time your builder is on board, three percent may be adequate. If you only have a 10% contingency when the only planning you’ve done is written a one-sentence description, then you’re doomed.

Contingency levels must be determined on a case-by-case basis. In general, the better the planning is and the greater the experience with the specific type of project, the lower the contingency can be.

Starting with a large contingency during conceptual development provides the flexibility to absorb work needed to complete the primary project scope without changing the bottom line. Examples of related work include: traffic lights at the cross-walk near a new school or reconfiguring existing sprinklers so they don’t rot the exterior walls of that new portable building.

And remember — the most important thing is to have enough money to finish the project!

Published: May 1, 2012 by Larry Goshorn / Category: Budgets, Public Building Programs

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