Fixed price contract and contingency

DoubleOhHoyaApril 8, 2012

Under a fixed price contract, is it typical for the builder to keep the contingency in the event it isn't used? Curious what the market is here?

Also, with allocation overages, are you charged a profit margin, or is this charged at cost?

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Increases and reductions to a Fixed Price are normally done by change orders and a Contingency would be part of the Owner's budget to cover unforeseen change orders.

However, sometimes a small (5%) contingency fund is included in a Fixed Price contract separate from the Fixed Price to pay for minor unforeseen emergencies or design shortfalls identified after construction begins. It is drawn down at the request of the Contractor and the approval of the Owner for small additional costs in order to avoid the disruption of a change order. It should not be used to pay for all or part of a change in scope of the work.

A Contingency is separate from the Fixed Price so if it is not used, it would simply not be billed to the Owner. It is essentially a limit to the amount of cost additions that can be approved by the Owner without a formal change order.

Requests to use the Contingency fund would be marked up the same as a change order.

Don't confuse this contingency with a contingency the contractor might add to his Fixed Price. Such an amount would only be identified in the contract of a Cost of the Work contract.

    Bookmark   April 8, 2012 at 7:34AM
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