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Addressing the contingency fund in your construction contracts

On Behalf of | Oct 18, 2021 | Construction Disputes

If there’s one thing that’s certain in a construction project, it’s that nothing is certain. That’s why smart contractors include contingencies in their contracts regarding deadlines and budgets. This way, the unexpected doesn’t have to throw a project into turmoil.

When it comes to budgets, it’s always wise to add a cushion to allow for unexpected costs. For example, the cost of a particular material might increase because of anything from shortages to tariffs. Errors by a contractor in their initial estimate of costs, however, wouldn’t be considered contingencies. That’s often caused by a lack of due diligence.

Contingency funds are typically either contractor-funded or owner-funded. An owner-funded one may be less accessible, as the owner would need to give their approval to use it.

What to include in a contingency clause

While detail is often an advantage in contracts, keeping some of the contingency fund language broader can make it easier for contractors and construction managers to access the money if they need it.

Among the things commonly included in a contingency clause are:

  • How the contingency is calculated
  • How the money can be used
  • Whose approval is required to use it
  • How the money from the fund that’s spent is reported
  • How any money remaining in the funds will be divided

While you don’t want to be too detailed about what kinds of situations warrant dipping into the fund, you still want both parties to have the same understanding of how and when the fund will be accessed.

A misunderstanding about that, just like any misunderstanding around language in a contract, can lead to conflicts and – worse – costly, time-consuming litigation that can harm your business’s reputation. That’s why it’s essential to have legal guidance when drafting any new contract.