Where contingency hides in the pay application

An owner who reads the pay application for contingency usually finds one line, reads the balance, and stops. That line is where contingency starts. It is not where it goes. On most GMP jobs a contingency draw is a transfer: the contingency line goes down, another line goes up by the same amount, and the money is then billed as work in that other line.

Reading contingency therefore means reading the whole G703 for the lines that grew.

The contingency line itself

On the G703, contingency appears as a scheduled value with a balance that shrinks. It rarely shows work completed, because contingency is not work. What it shows is the amount still unallocated. The movement month to month is the net of transfers out, and occasionally transfers back in when an estimate came in low.

Two things the line does not tell you: where the money went, and why. A contingency line that dropped by $120,000 this month could have fed one mechanical change or six small ones across four trades. The G703 shows the drop and nothing else.

Following the transfer

The money lands in other scheduled values. Under most AIA A133 based agreements the contractor may revise the schedule of values to reflect contingency use, and the revised values appear on the next G703. So the reading method is a comparison: this month's scheduled value column against last month's, line by line. Lines that grew are lines that received contingency, a change order, or both.

Separating contingency from change orders is the next step. The G702 carries the net change by change orders, and the G703 usually lists approved change orders as their own lines or as additions to existing lines. Growth in a scheduled value that is not explained by an executed change order is, by elimination, contingency or a reallocation between lines.

On a fictional $29 million office interior, the owner's representative built a simple month over month comparison of scheduled values. In one month, electrical grew by $85,000, drywall by $30,000, and the contingency line fell by $115,000. No change orders were executed that month. The contingency narrative listed one draw of $90,000. The $25,000 difference became a question, and the answer was a second draw the contractor had not yet written up.

The places it hides

General conditions is the first place. Schedule recovery, extended supervision, and added temporary facilities often come from contingency and land in the general conditions line, where they blend with the monthly burn that was always expected. A general conditions line growing faster than the schedule is worth a look.

Allowance lines are the second. Some contractors fund an allowance overrun from contingency rather than submitting a change order, which hides the overrun from the owner's allowance reconciliation. The allowance line stays at its scheduled value, the contingency line drops, and the overrun never shows as one.

Fee is the third, on contracts where fee is a percentage of cost of the work. A contingency transfer into a trade line raises cost of the work and may raise fee with it. Whether that is permitted depends on the contract, and owners should check theirs.

Lines that shrink

Occasionally a trade line falls and contingency rises. That is a buyout saving returned to the fund, or a line corrected downward. It is good news, usually, but it also changes the contingency balance in a way that makes the exhaustion date look better than the draws alone would justify. The owner's ledger should record the return separately from the draws.

Building the comparison each month

The method is mechanical once set up. Keep each month's G703 scheduled values as a column. Compute the change per line. Match each change to an executed change order, a contingency draw from the narrative, or a reallocation. Anything unmatched is the question list for the contractor.

Costwitness stores each pay application as a snapshot and shows scheduled value movement by line next to the contingency ledger and the change order register, flagging growth that neither explains. The software finds the unexplained movement. The explanation comes from the contractor, and the judgment on it from the owner.

In the product

Contingency ledger, GMP baseline, Allowance register. Free tool: Pre-GMP Readiness Score, Contingency Runway.

Keep reading

Earlier: How the contingency runway calculator arrives at a month. Later: Moving a draw between funds: why every reclassification needs an audit trail. All articles on contingency.