Refurbishment and development projects require careful planning and due diligence. The budget for the project must be thoroughly considered to ensure that you have sufficient funding in place to complete the works and also that the scheme stacks up and makes a profit.
No matter how meticulously you plan, unforeseen circumstances are an inherent risk of such projects and so a healthy contingency amount within your development budget is a non-negotiable aspect to ensure that your project can withstand any challenges that might appear throughout. This blog post explores the importance of having a robust contingency fund, addressing the impact of provisional sums by contractors, material price inflation caused by supply chain shocks, unforeseen works, and inadequately budgeted elements of your project.
PROVISIONAL SUMS
Provisional sums are allowances within a project's budget to cover specific items that have not yet been fully defined during the initial planning phase. Contractors may use provisional sums to account for elements like uncertain ground conditions, unforeseen structural issues, or unspecified finishes. Ideally, you should try to minimise the amount of provisional sums within your build budget and this can usually be done by completing further due diligence on the project to remove the uncertainty attached to each item.
It is also important to ensure that for any provisional sums that remain, whether the allowance is sufficient. This will be easier for some items like flooring, tiles, carpets etc. where a price per square metre allowance can be easily checked whereas others could be more difficult for more specialist works like foundations, structural works etc. If you are unsure, you can appoint your own quantity surveyor to give an opinion on the likely development costs.
The contingency allowance within your budget can be used if the actual cost of works exceeds the provisional sum allowed for within the budget so that you don’t have to compromise on the quality of finish for your project.
MATERIAL PRICE INFLATION
The construction industry is highly susceptible to supply chain disruptions that can cause significant fluctuations in material prices. Natural disasters, political instability, or global events, like the COVID-19 pandemic, can lead to shortages and increased costs for construction materials. Given that projects can be priced well in advance of works beginning, there is a risk that over the course of the project, materials prices could change significantly.
In some cases, you can protect against material price inflation by securing the materials that will be needed for your project however this is not always practical to do so.
Having a healthy contingency allowance can help to protect against price inflation so that you can maintain quality of the materials being used and avoid delays in having to source alternative products.
UNFORESEEN WORKS
In any refurbishment or development project, unforeseen works are almost inevitable. These can be hidden defects, structural problems or amendments to plans. In some cases, these may only be minor alterations, however some are more problematic (and costly) and must be dealt with appropriately in order to comply with building regulations.
It is very difficult to avoid unforeseen works occurring as, by their nature, they are not known until you start works, however by completing thorough due diligence, you can potentially avoid some issues. This might be by engaging a structural surveyor to assess the condition of the building (for refurbishments) or completing ground investigation works on a site.
A sufficient contingency allowance means that unforeseen works can be promptly addressed without having to worry about finding funds to cover the additional costs.
INADEQUATELY BUDGETED WORKS
Contractors may occasionally underestimate the complexity or cost of certain tasks, leading to inadequately budgeted works. This may happen due to unforeseen market conditions, labour shortages, or inaccurate project assessments and the result could be a revision to the works, a reduction in quality to fit in line with the budgeted amount or even unfinished works.
Having a sensible contingency allowance can bridge the gap for works which have been inadequately costed, avoiding compromises on quality and potential delays.
CONCLUSION
A sufficient contingency allowance on a project can help to avoid a lot of headaches and problems which might occur during a build. Deciding on what amount is ‘sufficient’ can be difficult as it will depend on a number of factors and the amount of due diligence completed. We generally suggest a reasonable contingency amount is 10% of the construction budget however all projects are different and so in some scenarios, a lower or higher amount may be appropriate.
When costing your project, it pays to be as thorough as possible and the advice of a quantity surveyor could be invaluable to ensure that your refurbishment or build is appropriately budgeted.
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