Contingency transfers between the two funds: when the contractor asks to move money

Somewhere past the midpoint of a GMP job, a request arrives that does not look like a change order. The contractor's contingency is running low, the owner's is not, and the proposal is to move some of the second into the first. It is framed as housekeeping. Nothing is being added to the price, the letter says; money is being reallocated inside a budget the owner already approved.

The framing is wrong, and an owner who accepts it has given up the most important distinction in the contract. The two funds are separate because they answer to different risks and different people. A transfer between them is a decision about who pays for what, and it deserves the same record a change order gets.

Why the funds are separate

The contractor's contingency sits inside the GMP. It covers the contractor's own risks: estimating gaps, coordination, buyout misses, the cost of things the contractor should have foreseen. When it is spent, the GMP does not move. When it is unspent at the end, it usually goes into the savings pool and is shared.

The owner's contingency sits outside the GMP. It covers the owner's risks: scope the owner adds, conditions nobody could have known about, design gaps where the contract puts them on the owner. When it is spent, the GMP goes up by change order. When it is unspent, it is simply the owner's money that was never needed.

A transfer from the owner's fund to the contractor's moves money from the second category into the first. Whatever it then pays for will be recorded as a contractor risk that the owner funded, and whatever is left will be shared at closeout as if the contractor had saved it. Both effects are real and both are invisible if the transfer is booked as a reallocation.

What the request is really asking

Take a fictional $31 million laboratory. At month eleven the contractor's contingency stands at $140,000 of an original $930,000, with seven months to run. The owner's contingency stands at $1.4 million of $1.5 million. The request is to move $400,000 across.

The first question is what the $790,000 already spent went on. If the log shows it went on coordination issues and buyout shortfalls, those are contractor risks and the fund did its job; the contractor is now asking the owner to fund the next round of the same risks. If the log shows it went on items that should have been owner change orders, the fund has been used to avoid raising the GMP, and the owner has been carrying those costs unknowingly through the savings pool.

The second question is what the $400,000 is expected to cover. A contractor who can name the exposures is asking for something specific, and each exposure can be assessed as a change order would be, with a cause. A contractor who cannot name them is asking for room, and room is exactly what the owner's contingency exists to deny.

The three honest answers

The owner can refuse, and let the contractor's contingency run out. What happens next is governed by the contract: the contractor generally carries its own overruns within the GMP, and the fee and the general conditions do not grow because the contingency is gone. That is the deal the contractor signed.

The owner can agree, by change order. The GMP goes up by $400,000, the cause is recorded, and the owner's fund is drawn by the same amount. The money now sits inside the GMP with a paper trail that says why. At closeout, if it is unspent, the savings clause says what happens to it, and the owner knew that when agreeing.

The owner can agree in part, item by item. Each named exposure is assessed as a change with a cause, and only those that are owner risks are funded from the owner's side. This is more work and it is the answer most contracts intend.

What the ledger should hold afterwards

Whatever the answer, the record needs the request itself, the contractor's contingency log at the date of the request, the exposures named, the decision, and the change order if there was one. The owner's fund shows a draw with a cause; the contractor's fund shows a credit with a reference to the same change order. Anyone reading either fund later can follow the money to the other one.

The transfer that runs the other way

Less often, the request runs from the contractor's fund to the owner's: the contractor has unspent contingency late in the job and proposes releasing it to the owner now rather than at closeout. It looks generous and it can be. It can also be a way of settling the savings split early, before the last change orders and the last allowance reconciliations are known. The owner should record the offer, check the savings clause, and answer after the anticipated final cost has been restated with the release in it.

In the product

Contingency ledger, Change order register. Free tool: Contingency Runway.

Keep reading

Earlier: The GMP amendment's exhibits: which pages the owner's ledger is built from. Later: A notice calendar built from the change order register, not from memory. All articles on contingency.