Why do I need a contingency?

When thinking about a building project people often start with an idea in their mind of how much they would like to spend. Sometimes this is realistic, but often the final cost of the project turns out to be far more than the initial cost that was budgeted for.

With many people borrowing money in the form of a loan or a re-mortgage to fund their home building project, it is really important to have an accurate budget at the start of the project.  A contingency built into this, allows for any unforeseen costs and ensures the amount borrowed will pay for everything, including the kitchen sink (if required!)

There are many reasons for overspend on a project. I recently embarked on a small project in my own home and I was reminded of how costs can escalate, not through any fault of the home owner or the builder, but purely through unforeseen circumstances which can arise over the course of the project.

I’ve given the builder a brief, why will there be any additional costs?

Additional costs usually happen for one of three reasons (or a combination of these):

1. An unclear brief from the client causing the builder to cost for less than is actually required or to provide an incomplete quotation.
2. Scope creep – the client adding more and more to the brief as the project progresses
3. Unforeseen circumstances.

Reason 1 – An ambiguous brief can lead to an incomplete quotation from the builder. This can be easily remedied by providing a clear set of drawings and good scope of works documentation for the builder from which to quote. A good architect, architectural designer or project manager should be able to help you prepare the necessary information required for the tendering process. This will ensure like for like quotations from each builder quoting for the project and will also minimise the need for ‘extras’ once the project is under way.

Reason 2 – ‘Scope creep’ is when the builder starts the job, and as he’s on site the client adds to his brief – this is very common, as when one part of the house is being worked on your remember all those other little things that need attention.

Any builder will tell you that this happens all the time and as long as the client asks the builder to give him a quotation for each of the additional things he needs doing, and makes sure he has the budget (and allows extra time) to do those extras too, then there should be no nasty surprises at the end of the job.

It is worth discussing ‘extras’ with the builder at the start of a project, and how he proposes to deal with them when the project is underway.  In an ideal world, a builder wouldn’t do something before you know the cost, but in reality once a job is halfway through sometimes things need doing which weren’t originally quoted for and there isn’t time to give the client a quotation there and then, so a little bit of flexibility is always required. Having a project manager who can make critical decisions in a timely manner and keep tabs on the extras is the ideal way to work and this can actually save money in the long run.

Reason 3 – Unforeseen circumstances are like stepping into the great unknown.  The larger the project, the more of these you are likely to come across. This can be something as innocuous as needing a few more bathroom tiles, meaning you have to go and buy a few more…. This has a minimal cost implication and can be dealt with quickly and easily….. however it could be a multitude of things and one thing can invariably lead to another. Mostly these things are things that could not be foreseen at the start of the project, as they were literally hidden behind a wall or under a floor. A contingency can help to account for some of these unknown additional costs.

A simple bit of renovation work… or more than that

For example with my recent bathroom & kitchen renovation project the walls I wanted insulated, which seemed like a simple enough job, had dead plaster, which needed to be removed, which we hadn’t allowed for, the damp in the kitchen was worse than expected, so took longer to dry out and needed more remedial work on the outside before we could start on the inside…. Leading to more plaster having to be removed and more plastering required.

The other knock on effect of more work needing doing, as well as the cost, is the time, so a small 2 week job can stretch to 3 or 4 weeks and a longer job similarly can take even longer…. A contingency in terms of time is also no bad thing. So although it might be tempting to squeeze the builder into saying it will take a week less than he says, it is safer to add a week to his original estimate.

Not only that, but your average house owner has no way of knowing whether the extras the builder is telling them that need doing are:

1. a) absolutely necessary
2. b) a nice to have in an ideal world, but not essential
3. c) totally fabricated by the builder to get more work/money

 

This again is where a good project manager (or failing that a brother who is a builder!) proves he is worth his weight in gold.

Without the reassurance from a knowledgeable and trustworthy third party that the ‘extra’ work is essential, and coupled with that, someone monitoring all those extra costs and ensuring they are competitively priced, it is easy for mistrust to occur between the house owner/client and the builder.

A simple contract between the client and the builder can also help with this and something that an architect, architectural designer or project manager can advise you about. If the builder doesn’t like the idea of a contract, perhaps you shouldn’t use that builder!

So how much of a contingency should I have?

This question is often asked and of course the easiest way to answer is to work on averages, based on statistics.  Here’s a frightening one:

95% of home building projects are overspending by 20-30%

The average cost overspend is typically calculated in one of two ways: either as a percentage namely actual cost minus budgeted cost, in percent of budgeted cost; or as a ratio of actual cost divided by budgeted cost. For example, if the budget for building a extension was £100 000, and the actual cost was £125 000, then the cost overrun may be expressed by the ratio 1.25, or as 25 percent.

In reality a 15-20% contingency on a small to medium home building project would be prudent.  If you don’t spend it, you can at least have a good party with what’s left at the end of the project!

About the author: Alison Phillips is an Architectural Designer with over 18 years experience of a wide variety of residential and commercial projects. She specialises in the best use of space and works on anything from concept design to planning and building regulations applications. Do contact her via http://www.alisonphillipsdesign.co.uk/ if you would like to discuss a potential project – she offers a free initial consultation in Herts and South Bucks.