A contingency is a future event or circumstance which is possible but cannot be predicted with certainty. That definition provides apt expectation regarding the Construction Contingency Allowance (CCA).
The CCA is a predetermined sum of money designated for a yet to be determined issue that can change the scope of the work during the actual construction of a project. It has been stated often that construction is more an art than a science.
Therefore, it is impossible to know in advance every issue or challenge that will be encountered once “dirt is turned.” The guarantee that you have before beginning construction is that you will discover unplanned items during the process. The best pre-construction planning will greatly reduce the number and complexity of the unplanned items, but eliminating them is impossible. Anyone who tells you otherwise would lie to you about other things as well. The CCA is a great tool for at least preparing for the financial challenges of discovering the unknowns during construction.
What is an appropriate amount for a CCA? Historically, the CCA dedicated prior to construction will range from five to 10 percent of the anticipated construction cost. CCAs for new construction on Greenfield sites are typically at the lower end of that range, while renovations and additions to older facilities are at the higher levels.
Experience shows that during the construction phase, there are four major categories of potential change of scope issues that benefit from having an appropriate CCA. They are:
- Unknown Conditions
- Building Inspector’s Modifications
- Project Owner Requested Changes
- Design Clarifications or Modifications
One of the most prominent sources of unknown conditions for new construction is what lies beneath the ground surface. Rock, unsuitable soils, contaminated materials, unexpected ground water, etc. are just a few of the surprises potentially awaiting you subsurface. Pre-design/pre-construction environmental reports and geotechnical explorations will paint an important and informative picture of what will be found once grading commences, but it is only a broad picture. The more comprehensive the reports and explorations that you commission — the more thorough understanding of the subsurface conditions you’ll receive. Every additional soil-boring or exploration procedure adds more pre-construction expense. Most project owners try to strike a happy medium by performing “standard” explorations and then dedicating an appropriate CCA.
Renovations and additions to older facilities, as implied above, have greater potential for revealing unknown conditions once selective demolition begins. Are the blueprints for the original facility available? Did the original builder actually construct the facility as it was designed? Have there been unknown or undocumented modifications during the life of the facility? What’s really behind that wall or under that slab? Renovations to older facilities can bring one surprise after another — many which can delay the new construction and change the anticipated scope of the work. This is why it is advisable to dedicate a CCA that is higher than that for new construction.
Building Inspection Modifications
Even though a plans reviewer for the local building jurisdiction will have reviewed the construction documents prior to issuing a building permit, there remains the likelihood that the building inspector will request modifications to the plans during the actual construction based upon what they actually see on the project and their interpretation of the applicable building code. And if you hope to get a Certificate of Occupancy from this same authority at construction’s end, you will have to make the requested modifications or successfully appeal the inspector’s request. Whether it is adding an extra exit sign, smoke detector or fire extinguisher, or whether it is something more significant, it will require more work from the building contractor, thus added expense. The CCA is intended to be the source of funds necessary for these requested modifications.
Project Owner Requested Changes
No matter how informed or experienced you are as a Project Owner, it is nearly impossible to express your every desire during the design phase. You will always see something during construction that you would like to change. There is nothing necessarily wrong with that. It may be shifting a wall to make a room bigger, or adding some more electrical receptacles along a wall or upgrading a construction material. Whatever the change, it can potentially require additional construction costs. The later during construction that the change is requested, the more it will likely cost to perform. The CCA is intended to be the source of funds necessary for these requested changes.
Design Clarifications or Modifications
There has only been one perfect designer, and He rested after six days of work. No designer since then has ever developed the perfect set of construction documents. There are always items that can be detailed better or more clearly. The design intent should be adequately reflected in the drawings and specifications so that the building contractor can bid and build the facility to meet the design intent. However, there will be times during construction when the builder will not be readily able to identify the exact intent of particular details or systems. At that time the builder will submit a Request For Information (RFI) to the designer for clarification or more information. The designer will issue clarifications or directives so that the builder can continue to meet the design intent.
On occasion, the RFI will reveal that something more than was shown in the construction documents is necessary to fulfill the design intent. The clarification or modification may impact the scope of the work to a degree that additional construction costs become necessary. As long as the design omission is not negligent, the CCA is intended to be the source of funds necessary for these design clarifications or modifications.
Should the CCA be included in the building contractor’s contract or not?
Most public projects make the CCA part of the contract. For instance, the bidding contractor is required to include in his bid a sum equal to five percent of the base bid for a CCA. Using this example, a construction bid of $1 million would designate an additional $50,000 as the CCA. Occasionally, a project owner will elect not to make a CCA part of the general construction contract, but may designate some arbitrary sum of money away from the construction contract to cover any increases in the work.
One advantage to including the CCA in the construction contract is that it is part of the contract sum. Therefore, the builder has included all potential work performed with the CCA in his original bonding of the project. The builder will then not have to mark up each requested change with a “bond mark-up.” Another advantage is that any additional work performed with the CCA will not increase the total contract sum. A change in total contract sum often requires approval from the project owner’s controlling authority. Most departments don’t want to have to go to the city council each time a slight change in work is necessary or desired. While some procurement departments may require a change order for changes in work, the work performed under a CCA is not a true change order because it utilizes funds already approved in the construction contract.
The CCA is not an open account for the builder to use at his discretion. All expenditures from the CCA must be proposed by the builder, then approved by the project owner and architect prior to being authorized. At the end of construction, all unused CCA will simply be “unused” and left unspent in your budget.
Keep your “plans” off of your CCA!
Occasionally, a project owner will start construction with big, non-construction plans for the CCA. Some may not budget separate funds for new furnishings – fixtures – equipment (FFE), but will presume that the CCA will go unused during construction, thus being available for FFE at the project conclusion. While it is very uncommon that all CCA funds will be used during construction, you should assume that they will be mostly consumed by project’s end. If any CCA is left unused by the end of construction, it will be a nice bonus.