Unused contingency at closeout: who keeps it under your contract
A well run GMP project finishes with money left in one or both contingency funds. The next question is obvious and the answer is not. Under some contracts the unused balance returns to the owner in full. Under others it is split. Under a few, the contractor keeps what it did not spend. The clause was agreed at signing and is usually forgotten until the final pay application.
The owner's contingency
Owner contingency is the easy half. If it sat outside the GMP, it was never in the contract sum and the unused portion simply stays in the owner's budget. There is nothing to reconcile with the contractor.
If it sat inside the GMP, the unused portion is part of the contract sum that was never billed. The final pay application should show the line with its remaining balance, and the contract sum is effectively reduced by a deductive change order or by the final reconciliation. Under most AIA A133 based agreements this money is the owner's, but the shared savings clause should be read to make sure it is carved out of the pool. Check your contract.
The contractor's contingency
The contractor's contingency is where contracts diverge. Three arrangements are common. In the first, the unused balance reduces the final cost of the work and returns to the owner in full. In the second, it is part of the savings between the GMP and the final cost, and the savings are split by a stated percentage. In the third, the contract treats the contingency as the contractor's to keep, on the logic that it was the price of the guarantee.
Each arrangement produces different behavior during the project. A contractor who returns all unused contingency has little reason to protect the fund. A contractor on a split has some reason. A contractor who keeps it has every reason, and the owner should expect harder arguments about whether each cost belongs in the contingency or in a change order.
The split arrangement also raises the question of what counts as savings. A contract that defines savings as GMP minus final cost of work will capture unused contractor contingency, unused allowances, and buyout savings together. One that defines savings narrowly may exclude one or more. The definition decides the pool, and the percentage decides the share.
A fictional closeout
A fictional $31 million elementary school finishes with $410,000 of contractor contingency unused and $220,000 of owner contingency unused inside the GMP. The shared savings clause splits savings 70 to the owner and 30 to the contractor, and it carves out owner contingency. The contractor's share is therefore 30 percent of $410,000 and nothing of the $220,000. If the carve out had been missing, the contractor's share would have been computed on $630,000. The clause was worth about $66,000 to this owner, and it was one sentence.
What gets argued about
The arguments at closeout are rarely about the percentage. They are about the balance. Late draws against contingency in the final months reduce the unused portion, and the owner should review each one with the same care as in month five. A contractor on a keep or split arrangement has no incentive to make late draws. A contractor on a full return arrangement may prefer to charge a cost to contingency than to its own fee.
Reclassifications are the other source of argument. A cost that was carried as a change order request all year and is moved to contingency in the final pay application changes the unused balance and the savings pool in one step. The owner's ledger should show when each item was classified and by whom, so that a late move is visible as a move.
Preparing the record before the end
By the time the final pay application arrives, the owner should already know the unused balance in each fund, the clause that governs it, and the arithmetic the contractor is likely to present. A closeout reconciliation that starts from the owner's own numbers is a short conversation. One that starts from the contractor's is a long one.
Costwitness carries each contingency fund's balance through to closeout, applies the contract's treatment of unused balances as the owner recorded it at signing, and shows the resulting share. The software does the arithmetic. The clause it applies is the one the owner and its counsel read into it.
Before the final pay application
- Read the clauses covering unused contingency and shared savings and write a one paragraph summary of who gets what.
- Confirm whether owner contingency is carved out of the savings definition, and raise it now if the wording is unclear.
- Review every contingency draw in the last three pay applications with the same attention as early draws.
- Compute the expected unused balance in each fund and the resulting split before the contractor presents its version.
Questions on this
If the contract is silent, who keeps unused contractor contingency?
Under most AIA A133 based agreements the cost of the work is what was actually spent, and unused contingency is not a cost, so the owner pays only for what was spent. But silence invites argument. If the clause is unclear, raise it with counsel before closeout rather than at the final pay application.
Does retainage affect the contingency reconciliation?
Not directly. Retainage is withheld from amounts certified, and the contingency balance is about amounts drawn. The two meet in the final pay application, where the unused balance reduces the contract sum and retainage is released on the final certified amount. Keep the two calculations separate in your record.
Can the owner use unused contractor contingency for late scope?
Only if the contract allows it, and usually it does not. Contractor contingency is for contractor risk. Owner scope added late is a change order against owner contingency or new money, even if the contractor's fund has room. Mixing the two at the end muddies the closeout record.
In the product
Shared savings, Contingency ledger, GMP baseline. Free tool: Shared Savings Calculator, Contingency Runway.
Keep reading
Earlier: The contingency log: what every entry should carry. Later: How much contingency a design stage usually needs, and why it is an industry pattern. 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.