I wrote last time about the forecasting process and the various factors which need to be considered when compiling a forecast. You can read part one of this blog here. I mentioned ‘contingencies’, so now we will investigate the meaning of contingencies and how they may be best used in forecasting. We will also touch on Trade Reserves.
Before we move on, I want to mention that Cheops has a ‘note type’ field in the forecast entry which allows us to tag each note with a type or category. Types are ‘F’ for Forecast Cost, ‘T’ for Trade Reserve, and ‘C’ for Contingency. Our forecast notes will all fall broadly into one of these three categories. There is a parameter to activate the ‘note type’ column, so if it is not displayed on your system, please contact CSSP customer service. There is also potential for additional types if needed.
We covered the general forecast notes (‘F’ type) in our last post, so now we can address the ‘C’ and ‘T’ types.
The Oxford dictionary defines a contingency as “something that might possibly happen in the future, usually causing problems or making further arrangements necessary”.
The Cambridge dictionary defines contingency as “a future event or circumstance which is possible but cannot be predicted with certainty”. In the context of forecast relating to construction management, a ‘contingency’ may be thought of as an amount to cover the costs of such a contingent event – something that cannot be predicted with any certainty.
A couple of examples are below. Take a hydraulics trade – let’s say we have a subcontract which excludes rock excavation in drainage trenches.
Example 1 – We have bore-logs, and we know that the subcontractor is likely to strike rock in a certain area. We could say that there is reasonable certainty. We can make an intelligent assessment of the likely volume of rock, and we can allow in our forecast for the cost to excavate the estimated amount or rock. In my view, this is an allowance (not a contingency). There is science to it. We have measured something and calculated a value.
Example 2 – We have bore-logs this time also, and from the bore-logs, we see that there is very little likelihood of striking rock, but we may decide to allow something just to cover ourselves. So in this second example, there is no certainty, but there is a possibility. There is minimal science to this one. This would be a contingency and the amount is close to a guess. Some may say that this situation could be included as a risk in the Risk & Opportunity section. That would also be valid, and we will discuss Risk & Opportunity in a future post.
The above gives an example of a trade contingency, but a contingency can also be utilised for an entire project. An example may be an Escalation Contingency which could be based on some percentage of the project cost, entered as a lump-sum in the forecast for future price increases.
Some construction project contingencies that I have seen include:
- Directors Contingency
- Construction Managers Contingency
- Escalation Contingency
- Trade Contingency
- Delay Contingency
Each business will have its own views on the names or labels.
The word ‘Reserve’ in accounting has a meaning somewhat similar to our use of the word in construction. In construction, it may generally be taken to mean ‘some allowance or money put aside for a specific purpose’. The Example 1 above, of the rock expected in the drainage trench, could be an example of a trade reserve. We expect to find rock, we have confidence in our estimate of the maximum cost, and we have reserved some funds appropriately.
As can be seen above, there can be a fine line between a forecast cost and a trade reserve. Cheops is not dictating how users should categorise their forecasts, but providing the tools and features needed by various companies to suit their own methodology.
So in our forecasting, we have entered some contingencies specifically at the trade level, and also ‘general’ contingencies for the overall project. We may have also entered some ‘trade reserves’.
We would expect that management will be interested in a report of the total value of contingencies and trade reserves in the project, and of course, Cheops has the ability to do this. Management can then assess the reasonableness or otherwise of the contingencies and reserves. For example, has the project team erred by making inadequate allowances, or equally concerning, by allowing excessive amounts?
The Cheops Forecast Notes report optionally displays the notes type, and a user-defined report can select a single type, or show each type value in a separate column, with totals for each type. It may also be useful to compare last month vs current month to see any movement in contingencies.
Until next time when we consider Risk and Opportunity. Happy building!
7th February 2023