Contingencies

Vince Bailey / April 2017

Hope for the best, but prepare for the worst.—Benjamin Disraeli

With construction activity on the steady upward incline, I think it’s safe to say we’re out of the woods. Tower cranes sprouting everywhere like dandelions after a rain, bustling concrete trucks rumbling over the roads on their pre-dawn runs, and the whirr and pop of power tools filling the air with the sounds of labor—all welcome signs that the worst is behind us. With all of this growing prosperity in the building trades, the keen competition of more desperate times is gradually subsiding. For estimators, this translates into a shift in their approach to bidding work. Not only are we able to be more selective in what we bid on, but we can afford to minimize risk by adding contingencies to our list of real costs.
    
Now, I have often overheard colleagues confusing contingencies with general conditions, and although they are somewhat related, the differences are pretty well defined. General conditions are based on incidental costs that are fairly certain to be incurred. In fact, they are so predictable that most estimating databases include a default list of expected GCs. Examples of general conditions include plan copies, small tools, job trailer, equipment rental, parking fees, engineered shop drawings, safety equipment, drinking water, etc. Contingencies, on the other hand, are accommodations for costs you suspect might occur or may not arise at all. Typical contingency costs include post-award engineering upgrades, manpower swings, sequencing issues and design ambiguities—“gotchas!”
    
Certainly the most annoying (and possibly the most pricey) contingency cost stems from the upgrade in steel framing material that inevitably arises from post-award shop drawings. More and more frequently we see structural drawings that omit any exterior heavy gauge framing, shifting the responsibility for engineered shop drawings on to the framing/drywall subcontractor. And while the cost of the shop drawings themselves are predictable enough to include in general conditions, the costs of upgrades to the steel that may or may not materialize in the drawings can be tough to anticipate in the initial proposal. While it may be fairly safe to rely on industry standards for size, gauge and flange width on a certain assembly, engineers are famous for throwing curve ball details that add substantial cost. While there is no certain formula for fixing the value of an added contingency, I’ve seen estimators tack on as much as 10 percent of their exterior framing material cost to their final pricing as a buffer against this potential increase for upgrades.
    
Another potentially debilitating condition lurking out there lies with latent manpower swings. This can be a double-edged sword that cuts both ways. In times of high activity, adding a project to the master plan may entail having to increase manpower through the hiring process—another trek into the great unknown. Predicting labor productivities with a familiar manpower pool is difficult enough, let alone with untested workers. And more often than not, during a boom the guys who are readily available are not exactly the cream of the crop. Conversely, if a job is winding down and the next project is, say, a month off, a savvy production manager will be reluctant to let good people go. Obviously, there is a cost associated with “warehousing” good hands when it’s contrary to an efficient exit plan. But again, while the exact impact of any manpower swing is hard to pin down, a contingency cost should be added to guard against a loss.
    
Proper sequence of work is critical to optimum performance, but the impact from the lack thereof is nearly impossible to anticipate. No matter how well-orchestrated or how well-intended the “pull plan” meetings seem to be, the flow of work charted out on paper seems to fall apart in practice with the first introduction of unanticipated obstacles. I’ve seen some pretty crazy stuff in this regard. Then there’s all of the inevitable “go-backs” that come from predecessor trades omitting small portions of work in areas that are otherwise ready for drywall cover-up. While estimates are typically based on a steady flow of work, some out-of-sequence performance is almost predictable enough to fall into the general conditions category. But the degree to which it occurs, and the impact of the damage that it inflicts, can be maddeningly murky. Still, some value should be assigned to this contingency, no matter how nebulous it appears to be.
    
Similarly, design ambiguities these days seem as certain as death and taxes. But these well-concealed gotchas are like crouching tigers in dense jungles, always attacking with the advantage of surprise. Again, the potential for gotchas should be accounted for with a contingency cost. How much is obviously a crap shoot.
    
And so I’ve presented still one more dilemma that bidmeisters nationwide must wrestle with. It’s obvious that if we weigh our proposals down with too many costly contingencies, we’ll never get any work. Then again, if we ignore contingencies altogether, we leave our companies vulnerable to damage. Clearly some allowance in preparing for the worst must be assigned. But placing an accurate value on a contingency is like shooting blanks at a rolling doughnut.

Vince Bailey is an estimator/project manager working in the Phoenix area.