Contractor contingency versus owner contingency: two funds, two purposes
Most GMP budgets carry two contingency lines. One belongs to the contractor and sits inside the guaranteed maximum price. The other belongs to the owner and usually sits outside it. They look alike on a summary page, and that is the problem.
When the two funds blur together, the owner loses the ability to answer a simple board question: is this project over because of the contractor's risk or because of ours? Keeping the funds apart is the first step in reading a GMP properly.
What the contractor's contingency is for
Contractor contingency is a line inside the GMP that the construction manager holds against risks that are its responsibility. Under most AIA A133 based agreements that means buyout shortfalls, trade coordination, estimating gaps, rework, and the unknowns that come with building from drawings that are never perfect.
The contractor priced that line when it set the GMP. It is part of the cost of the work, so the owner is paying for it whether it is used or not. What the owner gets in return is a price ceiling. The contractor's contingency is the cushion that makes the ceiling credible.
Because the contractor owns the risk, the contractor usually controls the draw. Many contracts require notice to the owner or the architect, and some require owner consent above a threshold. Check your contract. The principle holds either way: this money was set aside for the contractor's problems.
What the owner's contingency is for
Owner contingency covers risks the contractor never agreed to carry. Scope the owner adds. Design changes the owner asks for. Unforeseen site conditions, where the contract puts those on the owner. Allowance overruns, in many agreements. Permit and utility costs that landed late.
This fund is the owner's money in a more direct sense. It sits in the development budget, often above the GMP line, and a draw from it is a change order that raises the contract sum. Nobody on the contractor's side can spend it without the owner signing something.
Take a fictional $42 million lab fit out. The contractor carries $1.3 million of contingency inside the GMP. The owner carries $2.1 million outside it. A mislabeled duct route that the subcontractor has to rework comes from the first fund. A second fume hood the research team asked for in month six comes from the second. Same building, two different pots.
Where the confusion starts
The confusion starts in the pay application. The G703 shows a contingency line with a balance that moves, and it rarely says why. A contractor's monthly report may show a single contingency figure that quietly combines both funds. A development budget may show owner contingency only and ignore the contractor's line entirely.
It gets worse when an item could go either way. An MEP clash might be a coordination failure, which belongs to the contractor, or a design gap, which under many contracts goes to the owner and may later be recoverable from the design team. The item is the same. The fund is not. Whoever classifies it decides which budget takes the hit.
An owner who does not keep a separate record of each fund ends up accepting the contractor's classification by default. That is not malice. It is simply that the contractor is the only party keeping a log.
Keeping the funds separate in practice
The fix is a ledger with two columns, one per fund, where every draw carries a date, an amount, a cause, and a pointer to the backup. Each month the owner compares the balance in each column against what the pay application shows. Differences are questions to raise, not errors to hide.
It also helps to record what each fund was set at when the GMP was signed. A contingency that moves should move against a frozen starting point, so the board can see the original figure, the draws, and the remainder as three separate numbers.
Costwitness keeps these two funds as separate ledgers on the owner's side, with every draw tied to a cause and a document. The software flags a draw that lands in the wrong fund or arrives without backup. People decide what to do about it.
What to do this month
- Find both contingency figures as they stood at GMP signing and write them down side by side.
- Pull the last three pay applications and list every movement in the contractor's contingency line with the reason given.
- List every owner contingency draw approved to date and confirm each one has an executed change order behind it.
- Read the contingency clause in your contract and note who must approve a draw from each fund and above what amount.
Questions on this
Does the owner pay for the contractor's contingency even if it is not used?
Usually the contractor's contingency is part of the cost of the work inside the GMP, so it is included in the price the owner agreed to. What happens to the unused portion at closeout depends on the contract. Some agreements return it to the owner, some split it as shared savings, and some let the contractor keep it. Check your contract.
Can the contractor draw on the owner's contingency?
Not on its own. Owner contingency is spent through a change order that the owner signs. The contractor can request it and make a case for it, but the decision and the signature belong to the owner.
What if the contract only has one contingency line?
Some smaller GMP contracts carry a single combined contingency. In that case the owner should still record each draw with its cause, so the record shows which draws were contractor risk and which were owner risk. That record is what matters at closeout.
In the product
Contingency ledger, GMP baseline, Change order register. Free tool: Contingency Runway, Change Order Exposure.
Keep reading
Earlier: Who approves a contingency draw, and who should. Later: GMP contracts under $15 million: is the structure worth the overhead. 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.