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Discussion Starter · #1 · (Edited)
ok we have finished a 2nd floor addition and sent in the final bill and the HO is contesting the use of the contingency.

at the last meeting we had with the HO the architect and myself i told them that the contingency is to be used for unforseen labor, price increses, bid misses, etc. and that IF there were any contingency money left over we could give them a refund or apply it to changes or extras.

by the way we have a fixed price contract and the contingency is in the fixed price not listed as a seperate expence. no where in the contract does the contigency appear it is lumped in with the price. therefore it is money that i can use as i need to, in my opinion.

during the construction the HO made some changes and in the conversation i said that they could come out of the contingency, thinking that the price would be covered, but all along i was using the contingency for my own needs and ended up useing all of it. in my mind there is no money left over to apply to changes.

in the final bill i listed the changes as extras and charged for them. now this is the rub. the HO was making changes,changes that they probably would have made anyway (but that is debatable), based on me telling them the cost was coming out of the contingency (probably should not have done that) when in the end the contingency did not cover the extras. now they don't want to pay for the extras because they thought the money was coming out of the contingency, which is what i told them i guess.

their point is, i think that if i had told them along the way that the contingency fund was empty that they would have made different choices on the extras maybe have done them maybe not.

and my point is that the contingency was mine to use and under my control, or when i told them that some extras were coming out of the contingency did i inadvertly transfer some control over to them?

what y'all think
 

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In my opinion, a contingency line item should only be used for unforseen situations that are unavoidable. When you make up a budget for a particular project, you might add 5-10% to cover these items. Sometimes more in a remodel, depenending on how old the house is, and what condition it's in.

Contingency's are never to be used for change orders, and I wouldn't disclose this to the homeowner. If all goes smoothe, and everybody is happy, you get a nice bonus. If you open up walls/floors and find rot or other issues you need to take care of, then you're at least covered to a point. Not having to go back to the customer for more money gives you bonus points.

Of course, if the problems are extensive, you should be able to request more money. You should have a line in the contract that states that.

As for your specific problem, I think it comes down to managing customer expectations. It's never good to surprise them in the end.
 

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DavidC
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by the way we have a fixed price contract and the contingency is in the fixed price not listed as a seperate expence. no where in the contract does the contigency appear it is lumped in with the price. therefore it is money that i can use as i need to, in my opinion.
This confuses me. I think your saying that the contingency is included in the fixed price but not.

I'd have to agree that it is missed communication on your part. You didn't say for sure, but it doesn't sound like you used any change orders along the way. Any deviation from the written specs must be covered in writing (change order) and signed by both parties before execution.

You mentioned a possible refund to the client and his ears stopped listening after registering that he was going to get a refund. This is why I will not give a customer a guesstimate on final cost if working by the hour.

I agree that contingency funds should not be used for change orders. I would go further to say that they should be documented in the contract that outlines how they are used or better yet, not mentioned to the customer if you use them.

I believe you are referring to what we call (and use) an oops factor to cover what we might miss. Rustbucket outlined exactly how they are disbursed.

I'm afraid this is one of those learning experiences. Make the most of it next time and move on.

Good Luck
Dave
 

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ok we have finished a 2nd floor addition and sent in the final bill and the HO is contesting the use of the contingency.

at the last meeting we had with the HO the architect and myself i told them that the contingency is to be used for unforseen labor, price increses, bid misses, etc. and that IF there were any contingency money left over we could give them a refund or apply it to changes or extras.

by the way we have a fixed price contract and the contingency is in the fixed price not listed as a seperate expence. no where in the contract does the contigency appear it is lumped in with the price. therefore it is money that i can use as i need to, in my opinion.

during the construction the HO made some changes and in the conversation i said that they could come out of the contingency, thinking that the price would be covered, but all along i was using the contingency for my own needs and ended up useing all of it. in my mind there is no money left over to apply to changes.

There ya go...
 

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solar guy
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If the HO was unaware of the extra charges and the amount of contingency good luck collecting. This is a losing battle lick your wounds and go home. of the contract each and every extra should have been documented and charged for. Contingency money as far as you are concerned is to cover stuff you may have missed on the estimate or contract. NOT for work that is clearly out of the scope. You additionally screwed the pooch by telling them that there was a contingency fund in your contract. Whether there or not THEY need to keep their own fund to cover add on's or unforseen conditions.
 

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Discussion Starter · #10 ·
i agree with everyone about missed communication
and i should not have opened my mouth about the contigency

as i was typing out my original post the HO position became more clear to me
the HO may have the upper hand here because of my big mouth.

in 20yrs this has never happened. it seems that we always made money on our jobs maybe not as much as i had planned or at the break even mark.

but i can't remember losing money to the point that i working for free.

damn tough year

the house turned out great though and the HO'S are very pleased with the work we did.
 

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... the house turned out great though and the HO'S are very pleased with the work we did.
Live and learn. If you push the issue you may end up on the wrong side of the customer.

Sometimes I put a contingency in an estimate but I definitely do not tell the customer or anyone else for that matter. It is for me if I short something or make a mistake.
 

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I believe that a contingecy fund should be used for the unexpected overun on a certain item, not for an upgrade or change order. I prefer to communicate all changes and upgrades by email corespondece to keep a good record for me and my customer to look back on. Also a printed change order showing the cost of the changes keeps things in order.
 

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I'm confused as to why this grey area was created in the first place.

Perhaps this is your normal MO... but it seems an ass-backwards way to handle overages and extras.

The contract should cover what the ACTUAL project costs are--with language to address how extras are handled if and when they are required due to issues with pre-existing conditions, changes to the scope of work, etc.

A discretionary contingency fee seems like a recipe for problems.
 

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Pompass Ass
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When you give a lump sum bid, you don't break down your costs, you give them the total cost and then if they have allowances, you list the allowances.

When you told them their change orders were being covered by the contingency, they are not being unreasonable by expecting it to be covered by the contingency, it looks like you just went to school on this job.
 

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I agree that you should estimate actual costs, however, there are some times that you do not know what you will run into and you may or may not be able to get a change order.

Another way to look at the contingency factor is instead of marking up the project your normal X factor you just use Y factor. If you do not need contingency then you made Y profit. Likewise if you do use contingency then you are back to your normal X factor.

The contingency can be used in a variety of ways. It could be for possible client aggravation, rising material costs, unknowns, etc. If you have to add contingency on every job though, then you may need to go back to school and learn estimating.
 

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Paper work, Paper work and more Paper work

Every time you used the contingency funds, whether you or the owner spent money or bought lunch with the money, should have sent a letter with the amount of the fund and what has been used and what is left in the fund. When the fund was exhausted then you should have sent a change order.

All the letters and change orders should have been sign by all parties and no work should have been done until the paper work was signed.

How do you argue with that.:w00t:
 

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There are two ways to use contingencies, one is for the home owners budgeting purposes (having a enough money set aside for unseen conditions etc.) The other is for the contractor to carry to CYA in case you missed something.
If you have contingency as a line item on the contract you have it should be the home owners, and any remaining $ is credited back.
Your "contingency" should be in the estimate and is the risk reward for doing business, (profit).
Bill
 
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