Restoring contingency: when a change order is withdrawn or a draw is reversed
In month nine the contractor drew $72,000 of its contingency for a coordination problem in the mechanical room. In month twelve the mechanical subcontractor agreed the problem was its own and absorbed the cost. The $72,000 comes back. Where does it go, and what does the ledger show?
The easy answer is to delete the draw. It is also the wrong one, because the fund's history is part of the contract record, and a ledger with entries removed is a ledger nobody can audit. The right answer is a second entry, dated in month twelve, that credits the fund with a reference to the first. The balance is the same either way. The record is not.
Three ways money comes back
A draw is reversed when the cost that justified it turns out to belong to someone else, as above, or when the estimate that drove it was high and the actual cost was lower. The fund it was drawn from is credited with the difference, on the date the difference became known.
A change order is withdrawn when the proposal is dropped before execution, or when an executed change is canceled by a later one. If the owner's contingency had been drawn for it, the owner's fund is credited. If it was still pending and weighted in the projection, the projection drops by the weighted amount and no fund moves.
A change order is reclassified when the cause is settled differently from the way it was first recorded. A change first booked as an owner scope item, drawn from the owner's fund, that turns out to be a design gap the contract puts on the contractor, is reversed on the owner's fund and drawn on the contractor's. Two entries, same date, cross referenced.
Why the round trip matters
Take a fictional $19 million community center. Over eighteen months the contractor's contingency shows fourteen draws and three credits. Two of the credits are reversals of earlier draws; one is a subcontractor back charge that the contractor recovered and returned to the fund. Anyone reading the fund sees seventeen entries and a balance. Anyone reading the same fund with the three credits deleted and the two reversed draws removed sees twelve entries and the same balance, and cannot tell that the fund was ever $150,000 lower than it is.
That difference matters at the midpoint review, when the burn rate is read from the history. It matters at closeout, when the savings pool is what is left and both parties want to know how it got there. And it matters if there is ever a dispute, because a fund with entries deleted is a fund whose keeper chose what to show.
Dating the credit
The credit is dated when the reversal became known, not backdated to the original draw. A draw in month nine and a credit in month twelve is a true account of what the fund looked like in months ten and eleven, which is when the burn rate was being read and the decisions were being made. Backdating the credit rewrites those months.
The projection and the report
A reversal moves the anticipated final cost, and the month's report should say so as a distinct item. On the fictional project, the $72,000 credit in month twelve appears in the movement as a reduction with its own line and its own cause, so that the board can see the projection improved because a draw was reversed, not because the estimate was cut. The two look the same in the total and mean opposite things about the project.
What the ledger holds
Every credit carries the date, the amount, the fund, the reference to the entry it reverses, and the reason in a sentence. A reclassification carries two entries with the same reference. A withdrawn change order stays in the register with a status of withdrawn and a date, not deleted, so that the proposal and its withdrawal are both on the record. None of this is extra work at the time. All of it is impossible to reconstruct later.
What to do this month
- Never delete a draw or a change order; enter a dated credit or a withdrawn status with a reference to the original.
- Date the credit when the reversal became known, not when the original draw was made.
- On a reclassification, enter the reversal on one fund and the draw on the other with the same reference and date.
- Show the reversal as its own line in the month's movement, so that the board sees why the projection moved.
Questions on this
Why not just delete the original draw?
Because the fund's history is part of the record. The burn rate, the midpoint review and the closeout all read the history, and a deleted entry makes it a different history from the one the decisions were made on.
When is a credit dated?
On the date the reversal became known. Backdating it to the original draw rewrites the months in between, which were read and reported as they were.
What happens to a withdrawn change order?
It stays in the register with a withdrawn status and a date. If a fund was drawn for it, that fund is credited. If it was pending and weighted, the projection drops by the weighted amount and no fund moves.
In the product
Contingency ledger, Change order register, Anticipated final cost. Free tool: Contingency Runway.
Keep reading
Earlier: The GMP in its last month: what moves in the weeks before substantial completion. Later: Zero dollar change orders: time extensions and scope swaps that still need a cause. All articles on contingency.
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