Trailing rate versus average rate: two ways to project a contingency

A contingency projection needs a rate: dollars drawn per month. There are two obvious ways to get one. Divide total draws by total months for an average. Or take the last few months only for a trailing rate. They are both defensible. They are both sometimes wrong. Owners should look at both every month rather than pick one and forget the other.

The average rate

The average rate takes every draw since the GMP was signed and spreads it evenly across the months elapsed. It is stable. A big draw in one month moves it a little. A quiet month moves it a little the other way. Over a long project it settles into a figure that is hard to argue with.

Its weakness is memory. The average carries the early months forever. If the first quarter was heavy with buyout shortfalls and the job has since calmed down, the average still reflects the heavy quarter. It projects a shorter runway than the recent pattern supports. The reverse is also true: a calm start followed by a turbulent middle will show an average that is too kind.

The trailing rate

The trailing rate uses only a recent window, often three or four months. It reacts quickly. If coordination draws pick up as mechanical rough in starts, the trailing rate rises within a month or two and the projected runway shortens. That is what an owner wants to see early.

Its weakness is noise. One large draw inside a three month window dominates the rate. A single $300,000 unforeseen conditions draw can make a fund that was on track look like it will be gone by spring. When that draw drops out of the window three months later, the projection swings back. A board that saw the first date and not the second will remember a crisis that never happened.

A four month window is a common compromise. Long enough to smooth one event, short enough to catch a real shift. The window should be fixed and stated, because changing it month to month lets anyone pick the answer they prefer.

A fictional illustration

Take a fictional $45 million hospital outpatient wing in month twelve of twenty two. The contractor's contingency started at $1.6 million and $800,000 has been drawn. Average rate: about $67,000 per month, runway twelve months, exhaustion at month twenty four, after completion. Trailing four month rate: $140,000 per month, because the last four months included mechanical coordination. Runway under six months, exhaustion at month eighteen. One fund, two dates, four months apart. The owner's next question is whether the coordination work is mostly done or mostly ahead.

Reading the gap between them

When the two rates agree, the project is drawing steadily and either projection will do. When they diverge, something changed. Trailing above average means draws have accelerated. Trailing below average means they have slowed. The size of the gap is how much they changed.

The gap is the cue for a cause review. Pull the draws inside the trailing window and sort them by cause. If they cluster on one category and that category's work is nearly done, the trailing rate will fall and the average is the better guide. If the category has months to run, the trailing rate is the honest one.

The owner's report should show both dates on the same line. Hiding one to keep the slide simple removes the one thing that prompted the right conversation.

A third view worth keeping

Some owners add a risk weighted projection: a manual estimate of what the remaining work is likely to draw, built from the remaining packages and their known issues. It is not a formula and it is not repeatable month to month. But set next to the two computed rates it shows whether the arithmetic matches what the team on the ground expects.

Costwitness computes both the average and the trailing projection from the stored monthly balances and shows each exhaustion date against the completion date, flagging the case where either lands early. Which projection to trust is a judgment the owner's team makes with the cause mix in front of them.

In the product

Contingency ledger, Monthly owner report, Anticipated final cost. Free tool: Contingency Runway, Pre-GMP Readiness Score.

Keep reading

Earlier: How much contingency a design stage usually needs, and why it is an industry pattern. Later: Owner contingency inside or outside the GMP: what the choice changes. All articles on contingency.