Contingencies and Allowances: Types, Application, and Phase-Based Reduction

Distinguishes design contingency, construction contingency, and allowances. Covers how each type is applied within cost estimates, how contingency percentages decrease as project definition increases through design phases, and how risk analysis drives contingency allocation.

ARE · Project Management

Overview

Every construction cost estimate includes money set aside for things that aren't fully defined yet. That money falls into three distinct categories, and mixing them up is one of the fastest ways to lose control of a project budget.

Design contingency covers work that's part of the project scope but hasn't been detailed enough to price accurately. It sits inside the Maximum Allowable Construction Cost (MACC) and shrinks as the design gets more specific. Allowances work similarly; they're placeholders for known items that just need more definition, like a lobby finish selection that hasn't been made yet.

Construction contingency is a different animal. It's the owner's reserve for surprises that show up after the contract is awarded: unforeseen soil conditions, coordination gaps between trades, code interpretation conflicts. It lives outside the MACC because it's not part of what contractors bid on.

The critical concept for the ARE is phase-based reduction. Early in a project, when the design is barely a concept, contingency might run 20% to 25% of estimated costs. By the time construction documents are complete, it should drop to 2.5% to 5%. That drawdown isn't arbitrary. It tracks directly with how much you actually know about the project at each phase.

Understanding which type of contingency applies, where it sits in the cost structure, and how it should change over time is a core project management skill that the PjM exam tests through scenario-based questions requiring you to evaluate budget decisions at specific project phases.

Essential

Cost estimates aren't just about adding up material and labor costs. A significant portion of every project budget goes toward accounting for what you don't know yet. The tools for doing that are contingencies and allowances, and they operate differently depending on the project phase. ## The Three Types You Need to Know Design Contingency is an amount included in the cost estimate to cover work that's part of the project scope but isn't fully defined at the time of the estimate. Think of it as placeholder money for decisions that haven't been made. A building's structural system might be identified as steel, but the specific connections, bracing details, and fireproofing approach haven't been designed. The design contingency covers the cost uncertainty around those unresolved items. Design contingency is included within the MACC (Maximum Allowable Construction Cost).

Professional

Consider a firm hired to manage a 45,000 SF medical office building through design and construction. At the concept design phase, the cost estimator presents a base construction cost of $14.2 million. The project manager needs to determine the appropriate design contingency and communicate it to the owner alongside the total project budget. Applying the standard phase-based reduction framework, concept design calls for 15% to 20% design contingency. Given that the building program is reasonably well defined but the structural and MEP systems haven't been selected, the PM recommends 18%, adding $2.556 million in design contingency for a total MACC of approximately $16.76 million. The owner also needs to understand that a separate construction contingency of around 5% to 7% of the construction cost ($710,000 to $994,000) should be held outside the MACC to handle post-award surprises. Fast forward to design development.

TLDR

Design contingency covers undefined design scope and sits inside the MACC; it decreases as design progresses (20-25% at programming down to 0% at bidding)
Construction contingency is the owner's post-award reserve for unforeseen conditions; it's outside the MACC and separate from the contract sum
Allowances are placeholders for specific known items where the product or specification hasn't been selected yet
GMP/design-build contingency covers scope not fully defined at buy-out and is part of the MACC
VA phase ranges: Project Book 20-25%, Concept 15-20%, SD 10-15%, DD 7.5-10%, CD 2.5-5%, Bidding 0%
GSA estimate class ranges: Class 5 (20-50%), Class 4 (15-30%), Class 3 (10-20%), Class 2 (5-10%), Class 1 (0-5%)
Risk analysis (Monte Carlo simulation, S-curves) should drive contingency levels, not arbitrary percentages
Sensitivity analysis identifies which cost drivers most affect the total estimate
Track contingency drawdown proportionally against design completion; drawdown outpacing completion signals trouble
Schedule contingency parallels cost contingency and is typically set at 70-90% confidence level

ELI5

Imagine you're planning a road trip across the country. You estimate gas will cost $400, food will cost $200, and hotels will cost $600. That's $1,200 total. But you're smart, so you bring extra money. The first kind of extra money is for things you know you'll spend on but haven't figured out yet. Maybe you know you want to stop at some national parks, but you haven't picked which ones or looked up the entry fees. That's like design contingency. You're setting aside cash for stuff that's definitely part of the trip; you just haven't nailed down the details. As you plan each stop and look up actual prices, you need less and less of that buffer because you're replacing guesses with real numbers. The second kind of extra money is for genuine surprises. A flat tire. A detour because a road is closed.

AREProject Management

Contingencies and Allowances: Types, Application, and Phase-Based Reduction

2 min read247 words

Contingencies and Allowances: What They Are and Why They Matter

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