Managing cost overruns

Where an overrun actually comes from

Two very different things get lumped together as "we went over budget." One is a cost the estimate already flagged as uncertain, a site condition not yet exposed, a material price that moved before the contract was signed. The other is a cost nobody scoped at all, an owner-requested upgrade, a code requirement discovered at permitting, a hidden defect found once demolition starts.

The first belongs to contingency. The second belongs to a change order. Treating both the same way, as one undifferentiated "the budget went over," hides which lever actually failed and makes it harder to explain to owners what happened.

Contingency: the buffer you already planned

Contingency is money set aside for uncertainty that is already known to exist in the current scope, even though its exact size or timing is not yet known. It is not a fixed percentage of the budget. How much a project carries depends on how developed the estimate is and how risky the project is, and that range narrows as design detail firms up.

"An amount added to an estimate to allow for items, conditions, or events for which the state, occurrence, or effect is uncertain."

Source: Recommended Practice 40R-08, Contingency Estimating, General Principles, AACE International

See Contingencies for how a board sizes and tracks this line.

Change order: the mechanism for everything else

Once a cost falls outside the scope the contract describes, contingency is the wrong tool, even if money is still sitting in that line. The contract mechanism for a scope, price, or schedule change is a change order, and it applies the same way whether the change is an unforeseen condition the contractor discovered or an upgrade the board chose to add midproject.

"An official change of any kind in the original scope of work or terms of a construction contract agreed to by the owner, contractor, and project designer."

Source: Change Orders, Associated General Contractors of America

See Change orders for how one gets written, priced, and approved.

When both run out

If contingency is spent and change orders keep arriving, that is a funding decision, not a construction one. Boards typically fund a shortfall the same three ways they funded the original project: reserves, a special assessment, or a loan.

Whether the board can approve additional funding on its own, or has to bring it to a member vote, varies by state and by your governing documents. Check your CC&Rs, bylaws, and state statute before assuming the board can act alone.

See Project budgeting, Funding projects, and Special assessments.