Non-disclosed contingency
It sounds a bit more sinister than it actually is, but this type of contingency can take many forms.
It’s not an opportunity to pull the wool, but it is a chance to really walk through a project and feel it out and see where the risks might be. There are lots of reasons why you might feel that it is necessary to build a bit of comfort into a pricing exercise, maybe the plans were a bit vague, maybe the client is really hard work. This type of contingency is not really called contingency, it is more often a padding of waste percentage, or an allowance for non-productive time.
Perhaps some extra project management, or an increase in labour rate.
Often it is something you would go through and adjust AFTER completing the nuts-and-bolts measure and price, and you feel your way through it using your instinct. This will include things like market conditions etc too.
A word to the wise, if you have decided (despite me telling you not to!) to disclose the inner workings of your pricing to your client for a fixed price contract, prepare to have to explain why you have felt it necessary to make the allowances. Or, hold on to your knickers and remember that you are the business owner and it is your choice how much you charge someone.
Disclosed contingency
This is quite the different beast. Often if you have formal tender documents to work to then there may be a clause in there stating a contingency allowance is required. It will tell you how much it should be, and you would clarify it again in your tender letter. It would be a line item in your trade summary that accompanied your tender letter.
Same situation without the formal tender docs, if you or the client wants to make sure a disclosed contingency is in there, use the same format as above.
Now, different to a non-disclosed contingency, you have to ask permission to use a disclosed contingency by way of a variation. It is not your money. It is simply a value suggestion for any potential overruns, but the contract price should be considered as the total value less that contingency amount. There is every possibility it wouldn’t be used at all, in which case, you can’t bill for it. I’ve seen builders get caught in this trap before, thinking it makes up the full contract value even if it is not used, don’t be that guy!
That being the case, you want to make sure you have enough coverage for your profit and offsite overheads should that contingency NOT be used. So, bear that in mind. If it is used, the variation would be applied as normal, raw costs plus service fee plus margin.
Clear as mud, right?