Why do some people (both construction clients and contractors) assume that calculating costs + contingencies + overhead + profit is “gouging”?
In reality, using the above formula is simply a matter of participating in a wise business practice.
I recently read a comment from a construction company owner who believes he shouldn’t build in contingencies because - to paraphrase his argument - restaurant patrons don’t pay extra for the kitchen’s mistakes.
BUT THEY DO.
The Restaurant Contingency Example
You can bet every smart restaurant owner looks at contingencies before determining their prices.
The basic restaurant formula is: Buy food, prepare food, then sell it to make a profit. Unfortunately, some perishable items spoil, servers and cooks make mistakes, and some patrons misread the menu.
Add to the above examples the problems associated with “on time” deliveries being disrupted, personnel who simply don’t show up, or an oven on the fritz, and you can see how contingencies play a role in risk management and pricing structure.
“Overhead” is a business term used to describe operational costs that are not directly related to materials and labor. Savvy restaurant owners pass the additional costs onto customers by adjusting the prices charged for food. Figuring overhead and contingencies allows them to plan for current and future costs and analyze ways to reduce costs to make their restaurant more profitable.
What is a Contingency?
At Dictionary dot com, we learn that the word contingency means dependence on chance or on the fulfillment of a condition; uncertainty; fortuitousness. Or it could mean a chance, accident, or possibility conditional on something uncertain.
Contingencies in Construction
Getting down to brass tacks, within construction – contingencies are unexpected events or situations that may affect the contractor’s business’s standard operations, revenues, or expenses. Some examples are:
natural disasters
supply chain disruptions
equipment failures
site deficiencies
unusual weather conditions
lack of skilled personnel
permit irregularities
legal issues
Weaving in Contingencies
In construction, there are two general types of contingencies:
The owner reserve is an amount set aside for additions to the project’s scope or the owner’s risk items.
The contractor contingency is an amount built into the contractor’s anticipated price for the project. It is meant to account for various risk factors that cannot otherwise be accounted for in a schedule of values.
Notice that one contingency amount is “set aside,” and the other is “built into.” It is the second type of contingency we are addressing here.
The construction company owner mentioned at the beginning of this article might not understand that accounting for contingencies is not a line-item amount to be added to a bid but rather a percentage woven into the bid. By weaving into your bids a percentage designed to account for contingencies, you are proving your business acumen, preserving your construction business, and protecting both your employees and your customers.
Ambitious Construction Contractors look to The Profit Constructors to provide advocacy in dealing with:
Clients and customers
Employees and subcontractors
Vendors and service providers
Governmental entities
Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:
Remain informed
Avoid hassles
Reduce risks
Be future-ready
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