What is Contingency, and How Does it Affect Custom Design in Sonoma and Napa?

At the risk of sounding like a politician, “it depends”. At early stages of project development, most budget contingencies are considered design contingencies. At 15% or more, they are intended to allow a cushion for construction costs that are not evident in preliminary drawings and may not have even been articulated by the owner.

At contract time, there are, or at least should be, 2 pots of money for contingency.

First, a prudent owner should maintain a contingency of up to 10% that is above the contract amount. This is not typically available to either the architect to cover embellishments, or to the contractor to cover mistakes and perhaps it is better if neither of them is aware of its existence or size. Its first purpose is to cover both expanded scope in case the owner’s needs change or were unclear to the architect. In addition, an owner needs a cushion for the dreaded “concealed conditions”: unexpected costs that were not included in the contract documents. The good news is that most of those problems surface early in the project, so an owner has time to adjust their budget or scope.

Napa and Sonoma County Builders Must Understand Contingency

The second important pot of money is usually labeled as either “builder’s contingency” or “contractor’s contingency”. This amount is included in the general construction contract. On a hard bid, fixed price contract, it is not visible to the owner but implicitly incorporated into the bidder’s markup calculations. Probably the most candid description that I ever heard was a separate line item for “TIF” (Things I Forgot). In a Guaranteed Maximum Price (GMP) contract, the amount of the contingency is negotiated between the owner and contractor, along with the fee and the cost estimates. It is usually expressed as a percentage of the costs, depending mainly on the stage of development of the drawings and the nature of the work. The risks of remodeling work or a GMP that is based on early documents almost always justify a larger contingency.

Avoid Errors in your Napa or Sonoma Home Design

After this entire prologue, what is the contingency for? For a contractor performing a GMP contract, they are hoping it will be sufficient to cover things like: first-mistakes or holes in the estimate due to misunderstanding of the documents, then-subcontractor defaults and failures to perform, and next- estimate mistakes like measurement errors and productivity rates by the contractor’s personnel. It may also be used to cover repairing work that is not the responsibility of a subcontractor or identifiable third party and the costs of accelerating the progress of the job or extended overhead when a project is delayed.

The contractor’s contingency is not intended to cover owner or architect changes. Contingency is the subject of countless redefinitions and torturous legalese so this short explanation may not cover some situations but it does try to cover the general consensus in the industry.

For more information about our home and commercial construction services, please contact our team today!

Jay True, former vice-president of JMA, became partners with Jim Murphy in 1987. In 2015, Jay and his wife Elaine True, our office manager, retired from JMA and moved to Michigan to escape the cool summers and warm winters in Santa Rosa.