Contingency burn rate: how to read it against percent complete
Ask a project team how the contingency is doing and you will usually hear a balance. Six hundred thousand left. Forty percent remaining. The number is true and it is almost useless on its own.
What the owner needs is the balance next to the progress of the work. Burn rate is the comparison between the two. It is not hard to compute, but it has to be computed the same way every month or the trend line lies.
Two percentages, one ratio
The first percentage is contingency consumed: draws to date divided by the original fund. The second is percent complete, which on a GMP job is best taken from the certified value on the G702 divided by the contract sum, since that is the number the owner is already paying against.
Put one over the other and you get a ratio. Consumed 45 percent of contingency at 45 percent complete gives a ratio of one. Consumed 45 percent at 30 percent complete gives a ratio of one and a half. The ratio is the burn rate in its simplest form.
A ratio of one means the fund is draining in step with the work. Below one means the fund is ahead. Above one means the fund is being used faster than the building is going up, and the remainder has to cover more work than the part already spent did.
Why the early months mislead
Contingency draws are not evenly spread across a project. Sitework and foundations tend to surface unforeseen conditions early. Buyout shortfalls show up when packages are awarded, which is mostly in the first third. So a ratio above one in month three is common and does not by itself mean trouble.
The reverse is also true. A low ratio at 20 percent complete can hide the fact that the mechanical and electrical packages, where coordination problems live, have not started. The fund looks healthy because the risky work has not happened yet.
This is why the burn rate needs a second reading: not just where the ratio is, but whether the remaining work carries more or less risk than the work already done. That is a judgment, not a calculation, and it belongs to the owner's team.
A fictional example
Take a fictional $60 million student housing project with $1.8 million of contractor contingency. At month eight the job is 38 percent complete and $900,000 has been drawn. Ratio: roughly 1.3. The owner's representative notes that buyout is finished and the remaining draws should come from coordination and field conditions only. That context turns a worrying ratio into a watchable one. The number did not change. The reading did.
Reading the trend, not the point
One month's ratio is a snapshot. Three months give a direction. Six months give a trend the board can act on. The ratio moving from 1.4 to 1.2 to 1.1 over a quarter is a fund recovering. The ratio sitting flat at 1.3 while percent complete climbs is a fund that will run out before the work does.
The trend only works if the inputs are stored, not recalculated. If the contractor restates percent complete in a later pay application, or a draw is reclassified and moved out of contingency, a recalculated history will quietly rewrite the past. The owner should keep each month's figures as they were reported at the time.
What the ratio cannot tell you
Burn rate says nothing about cause. A ratio of 1.5 driven by unforeseen soil conditions is a different project than a ratio of 1.5 driven by buyout misses across six packages. The first is bad luck. The second is an estimating problem that may continue. Only a contingency log with causes can separate them.
Costwitness stores each month's contingency balance and certified percent complete as a snapshot and shows the ratio as a line. It raises a flag when the ratio crosses a threshold the owner sets. Why it crossed is for people to work out.
What to do this month
- Compute the ratio for the current month using certified value from the G702, not the contractor's schedule percent.
- Go back and compute it for every prior pay application using the figures as they were reported then, and plot the result.
- Write one sentence about what risk the remaining work carries compared to the work already done.
- Agree with your team on a ratio that triggers a conversation, and put it in the monthly report.
Questions on this
Should percent complete come from the schedule or the pay application?
For contingency burn rate, use the pay application. Certified value against contract sum is the financial progress, and contingency is a financial measure. Schedule percent is useful context but it can run ahead of or behind the dollars.
What ratio should worry an owner?
There is no fixed number that works for every project. The useful question is whether the ratio is rising or falling and whether the riskier work is behind or ahead. Many owners pick a ratio around 1.2 as a point where they want a written explanation from the contractor.
Does burn rate apply to owner contingency too?
Yes, and it is often more telling there, because owner contingency draws are change orders the owner chose to sign. A rising owner burn rate usually means scope is growing, and that is a conversation for the owner's own organization rather than the contractor.
In the product
Contingency ledger, Monthly owner report, Anticipated final cost. Free tool: Contingency Runway, Pre-GMP Readiness Score.
Keep reading
Earlier: The exhaustion date: why a date beats a percentage in a board meeting. Later: Who approves a contingency draw, and who should. All articles on contingency.
See the two funds on a project like yours.
Thirty minutes on a call. The twin drawdown chart on a fictional project at your GMP size, and the month the fund runs out.