What happens when the contractor's contingency runs out

The contractor's contingency hits zero somewhere in the final third of a lot of projects. That is not a failure of the contract. The fund was sized to be used. What matters is what the owner sees in the months after, because the costs that would have gone to contingency still arrive, and they have to go somewhere.

The contract answer: the contractor's problem

Under most AIA A133 based agreements, the guaranteed maximum price is exactly that. If the cost of the work plus fee exceeds the GMP for reasons within the contractor's responsibility, the contractor pays the difference. An exhausted contingency does not raise the ceiling. The contractor's own margin absorbs what comes next.

This is the owner's protection and it is real. But it sets up an incentive. A contractor with no contingency left and its fee at risk has every reason to look harder at whether each new cost might be the owner's responsibility instead. Not dishonestly. Just carefully. The classification of each item becomes a negotiation rather than a bookkeeping entry.

Check your contract for the fee arrangement too. A fixed fee means the contractor eats overruns from profit. A percentage fee on cost of work can behave differently, and the exact mechanics at the GMP ceiling are worth reading with counsel before the fund runs dry, not after.

Three places the cost goes next

The first place is the contractor's fee. Costs that are clearly contractor risk, such as rework and subcontractor shortfalls, reduce the fee. The owner usually does not see this directly. The pay application keeps showing the GMP. The only sign is a contractor that becomes more careful with every other request.

The second place is the change order log. Items that might be owner scope, design gap, or unforeseen condition will now be submitted as proposed change orders rather than absorbed quietly. The owner should expect PCO volume to rise after contingency exhaustion and should be ready to classify each one on its merits, not on the timing.

The third place is the work itself. A contractor under margin pressure may propose substitutions, value engineering late in the job, or deferral of items into closeout punch lists. Some of this is legitimate. All of it needs the owner's eyes on it.

A fictional example

On a fictional $28 million charter school the contractor's $950,000 contingency reached zero in month fourteen of nineteen. In the following three months the owner's representative logged eleven PCOs, against an average of three per month before. Seven were classified as design gap after review and went to owner contingency. Four were rejected as coordination and stayed with the contractor. The pattern was visible only because the owner kept its own PCO count by month.

What the owner should do before zero

The best time to prepare is when the exhaustion date first lands before completion. At that point the owner should review the cause mix of draws to date. If most were buyout shortfalls and buyout is finished, the rate will fall on its own. If most were coordination and the mechanical rough in is still ahead, the fund will not last and the owner should plan for the PCO wave.

It also helps to have the owner's own contingency position clear. Some of the coming PCOs will be legitimate owner costs. The owner should know what it can absorb before the requests arrive, so that each one is judged on its cause rather than on whether there is money left.

Keeping the record clean afterward

After exhaustion the owner's ledger should keep recording what would have been contingency draws, even though the contractor's fund shows zero. The reason is closeout. If the contract has a shared savings clause, or an audit right, the history of what the contractor absorbed and what it submitted as change orders is the basis for any later conversation.

Costwitness keeps the contingency ledger open past zero and flags the rise in PCO volume that typically follows. It also shows each PCO's classification next to the owner's remaining contingency. The software shows the pattern. The owner decides what each item is.

In the product

Contingency ledger, Change order register, Anticipated final cost. Free tool: Contingency Runway, Change Order Exposure.

Keep reading

Earlier: Contingency draws without backup: flag them, do not block them. Later: The exhaustion date: why a date beats a percentage in a board meeting. All articles on contingency.