What is contingency and how does it impact cost estimates in civil engineering projects?

Contingency is a widely used but often misapplied term in most projects. The level of contingency required on a project is determined by the risk profile and probabilistic assessment of risk. What is often overlooked is contingency application during the earliest phases of a project. In my experience, scope changes, new concepts and errors or initial omissions need to be included in a contingency. Especially where you might have a large set of unknowns and are designing facilities in support of a certain capability such as a vessel, IT project, aircraft, system or platform. These types of projects are often designing the new capability alongside facilities.

Unforeseen site conditions such as hidden geological issues, soil problems that become apparent only during construction. Modifications to the project scope that may occur due to client requests, design changes. Changes in material prices, labor costs or other market conditions that were not accurately predicted. New regulations or unexpected changes in existing regulations that affect the project and require additional expenditures. Delays or disruptions caused by weather conditions, which can impact construction schedules and increase costs. Regardless of having CAR insurances or not, events such as accidents, equipment failures, or other unforeseen incidents that can disrupt the project and lead to additional costs.

Contingency in civil projects is an extra fund for unforeseen events like design changes or delays. It cushions against cost overruns, but its size should balance covering risks without inflating the budget significantly. It's vital for managing uncertainties in estimates, ensuring smoother project execution.

Contingency is an allowance for project unforeseen costs that may arise during a project due to factors such as design changes, site conditions, market fluctuations, weather, quality issues, or delays. Contingency is not meant to cover scope changes, errors, or omissions, which should be addressed separately. Contingency is usually in %age

A practical example of something addressed in a contingency could be variable pile penetration depths for marine structures. Designs are normally based on test boreholes, whereas there could still be local variations in actual rock levels. The contingency should cover unforeseen cost variations such as more variable rock levels that were not apparent in site inspections.

The easiest way to do this is to multiply the probability percentage by your estimated cost impact, providing a risk contingency for each line item. For example, a risk probability of 5% multiplied by a cost impact of $40,000 equals a risk contingency of $2,000. Perform the risk contingency calculation above for every identified project risk and then add them together, you’ll have a strong contingency calculation. Whatever you calculate your contingency to be, you’ll need approval from your project sponsor to set the funds aside. Depending on the project length, re-evaluate the contingency, as the balance between the contingency and uncertainties in the forecasted costs to complete remaining work may change as the project progresses.

Parametric estimation is also an option which uses mathematical equations or algorithms that relate project costs to key parameters like size, duration, location, or complexity. These equations or algorithms are derived from empirical data or theoretical models and can be apply to estimate the base cost and contingency or use expert judgement is one approach.

Thumb rule is to multiply the risk percent with project value or cost OR as per past Engineering experiences. Contingencies margin shall be kept in both areas like project schedule and budget to minimise risk.

Contingency is calculated by assessing the potential risks and uncertainties associated with a project or situation. It involves estimating the probability of these risks occurring and the potential impact they may have. The contingency amount is typically determined by multiplying the estimated risk probability by the potential impact, and adding it to the project or budget as a buffer to account for unexpected events or expenses.

In common projects, the contingency is typically a percentage of the budget. However, in complex projects, those with special requirements, or in scenarios where the company has not undertaken similar projects before, the contingency needs to be higher.

The criteria that impacts to consider the contingency factor, the most is the project value. This is normally considered as per international contract coded & bye laws like Fidic to keep margin of all natural and accidental factors that are likely to impact the project. This shall be applied by fixing minimum project values limit as per organisations standards.

I realised that: Contingency can have a significant impact on cost estimates as it is added to the project or budget as a buffer to account for unforeseen events or expenses. If the contingency amount is too low, it may not be sufficient to cover unexpected costs, resulting in a budget overrun. On the other hand, if the contingency amount is too high, it may unnecessarily increase the project or budget cost. Therefore, accurate assessment of potential risks and uncertainties is crucial in determining an appropriate contingency amount to ensure cost estimates are realistic and reliable.

Contingency impacts cost estimates in several ways. 1-Effecting Budget, Funding, Feasibility 2-Uncertainity in estimate effect risk 3-Performance and Quality

Contingency significantly impacts cost estimates in civil engineering projects by serving as a financial buffer to address unforeseen events, risks, and uncertainties. Its influence is multifaceted, shaping the realism of budgets, facilitating effective risk management, providing financial protection, bolstering stakeholder confidence, and influencing contractual agreements. (1) Budget Realism: Contingency ensures that cost estimates are realistic by acknowledging the inherent uncertainties in construction projects. Without contingency, initial estimates might appear artificially low, potentially leading to budget shortfalls.

Contingency provides flexibility for the project team to address unforeseen challenges without disrupting the project schedule or quality standards. It allows for responsive decision-making when unexpected issues arise. Civil engineering projects require careful planning, risk assessment, and the inclusion of appropriate contingencies to ensure successful execution within budget and schedule constraints.

The use of contingency in civil engineering projects offers several benefits that contribute to the overall success and financial sustainability of the project. Here are some key advantages: Financial Protection: One of the primary benefits of using contingency is financial protection. Unforeseen events, risks, and uncertainties are inherent in construction projects. Contingency provides a financial safety net, ensuring that the project has the necessary funds to address unexpected expenses without jeopardizing the overall budget. Risk Mitigation: Contingency serves as a proactive risk management tool.

Risk minimization in terms of project cost is the main benefit to the service provider or contractor. This reduces the conflicts between project owner and contractor/ service provider throughout the project life cycle.

1. Risk Mitigation: Contingency allows for the allocation of resources to address unexpected events or risks that may arise during a project. It helps mitigate the impact of unforeseen circumstances, minimizing disruptions and delays. 2. Financial Protection: Contingency serves as a financial safety net. It helps protect against unexpected costs, ensuring that funds are available to address unforeseen expenses or emergencies. 4. Stakeholder Confidence: The presence of contingency demonstrates proactive planning and risk management. It instills confidence in stakeholders, such as clients, investors, or team members, as they see that potential risks have been considered and provisions have been made.

Contingency is part of the risk management process and ensures enough budget is available to complete the project. If there isn’t sufficient budget, the project may be put on hold midway. One of the advantages of the pre-concept and concept design stages is to quantify the cost, confirm the budget, and ensure no scope gaps.

1. Overestimation or Underestimation: Determining the appropriate amount of contingency can be challenging. Overestimating may lead to unnecessary budget allocation, while underestimating may result in insufficient funds to address unforeseen events or risks. 2. Lack of Precision: Contingency is often based on assumptions and estimates, as it is difficult to predict all potential risks accurately. This lack of precision can make it challenging to allocate the right amount of contingency for specific events or circumstances.

It is important to manage contingency effectively. Overestimating or underestimating the contingency can both have adverse effects. Too much contingency may tie up funds that could be used elsewhere, while too little could lead to budget shortfalls and project delays when unexpected events occur. Construction projects require careful planning, risk assessment, and the inclusion of appropriate contingencies to ensure successful execution within budget and schedule constraints.

Reviewing and managing cost estimates at each design phase is crucial to ensure that everything is covered, avoiding any cost or scope gaps. It is important to ensure that the cost estimate is accurate and realistic, based on the drawings and current market rates. Sometimes, cost consultants may attempt to impose higher-level cost estimates. However, this should not be accepted. Instead, each discipline manager and the cost team need to be involved in reviewing and confirming the cost, cost assumptions, and accuracy level and quantities in addition to triggering the possible value engineering.

At times this could lead to unwanted expenditure apart from achieving project objectives. So, the provision kept & its use needs to be addressed.

Contingency works or costs:-It's very pivotal to consider each and every aspect of what is about to come or have an tendency to occur once a project is live,during the planning phase these factors needs to be considered,it can be external or internal ,be it design changes or some misc developments, contingency funds are a part of buffer costs which are calculated and kept aside as a total of Maximum 5% of overall expected project cost to be incurred.If the consideration isnt kept during the planning phase for those contingency works/costs it may push the project cost to go beyond the expected value.

Contingency in civil engineering refers to a portion of the project budget set aside to cover unforeseen risks and uncertainties. In my experience it depends on how much information is available at the time of bidding. If it’s a conceptual phase higher contingency values are to be configured and as project planning phase progress, Contingency factors also minimizes as many unknown factors such as actual soil conditions is determined. Contingency impacts cost estimates by providing a financial cushion, helping to mitigate the impact of uncertainties and reducing the risk of exceeding the budget during project execution

Regardless of what contingency you use, the most important thing is that one should always state their assumptions and be able to provide record of how you or the team arrived at that contingency. Contingencies typically get smaller the further you move along the phase of the project, i.e. a larger contingency during the planning phase and as your target get's closer, smaller values as you approach construction.