Every Well-Run Project Has Contingency - The Question Is How It Is Structured
Contingency is money set aside in the project budget to cover costs that are expected but not yet identified. No project goes exactly as planned: design evolves, site conditions surprise, materials prices fluctuate, and scope decisions get made mid-project. A project without contingency is a project headed for a budget crisis. The ARE tests candidates' understanding of the different types of contingency, who controls each type, and how contingency draws work in practice.
Types of Contingency
Design Contingency
Design contingency is held by the design team (or the cost estimate) to account for the incomplete state of design documents at the time the estimate is prepared. At SD, the cost estimate may show 20% contingency because the documents only represent 20–30% of the design decisions that will ultimately be made. As design progresses and documents become more complete, the design contingency is typically reduced - ideally to zero or near-zero at CD completion. Design contingency does not cover scope changes; it covers the uncertainty inherent in estimating from incomplete documents.
Owner's Contingency
Owner's contingency is held by the owner to cover voluntary scope changes made during design and construction. If the owner decides to add a conference room, upgrade to better finishes, or expand the lobby during construction, the cost comes from the owner's contingency. The owner controls this contingency and authorizes draws from it when changes are approved. On well-managed projects, the owner's contingency is 5–10% of the construction budget established at project inception.
Construction Contingency (Contractor's Contingency in CMr/GMP)
In a GMP (Guaranteed Maximum Price) contract, there is typically a construction contingency included within the GMP - controlled by the contractor or shared between owner and contractor. This contingency covers unforeseen field conditions, coordination problems discovered during construction, and minor scope gaps in the documents. Under typical CMr contract terms, the contractor can draw on this contingency for conditions covered by the contract without needing a change order, but major draws require owner notification.
How Contingency Differs from Allowances
Allowances are different from contingency. An allowance is a defined line item in the contract for a specific element whose final cost is not yet known at bid time - typically owner-selected items like tile, lighting fixtures, or hardware. The allowance appears in the bid documents as a fixed dollar amount (e.g., "tile allowance: $15 per square foot"). If the actual cost exceeds the allowance, a change order is required; if the cost is less, the owner benefits from a credit. Allowances are specific; contingency is general.
Typical Contingency Percentages
| Stage | Design Contingency | Owner's Contingency |
|---|---|---|
| Programming | 20–25% | 10–15% |
| Schematic Design | 15–20% | 10% |
| Design Development | 10–15% | 7–10% |
| Construction Documents | 3–5% | 5–7% |
Key Exam Points
- Design contingency covers estimate uncertainty as design develops - decreases over time.
- Owner's contingency covers voluntary scope changes - controlled by the owner.
- Construction contingency (in GMP) covers unforeseen field conditions - controlled by the contractor or shared.
- Allowances are different from contingency - they cover specific unknown selections.
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