If you are a contractor, one risk management tool to include in your contract with homeowners is the construction contingency clause. This is a percentage of the contract value that is reserved for unanticipated changes in your work's breadth and scope.
Construction contingencies can be added either to the original estimate or included with the client's budget. While responsible contractors always try to include all possible expenses in their bids, it's impossible to factor in every potential extra expense on each job. That's what these safety nets are for.
Sometimes the client changes horses in the middle of the stream on a construction project. It can be ridiculously expensive to make these late changes, but when the goal is to please the homeowner, a wise contractor does all that is possible to make it happen. Construction contingencies can really save a project in these instances.
An owner-budgeted contingency may stipulate that all applications be approved by the homeowner and that all unspent contingency funds be appropriately credited at the project's end. Alternatively, the homeowner may use unspent contingency funds to mitigate the expense of change orders for additional labor costs or alterations.
It is vital to the success of a project that both the contractor and the homeowner have a clear understanding of what the construction contingencies cover and do not cover regarding the project. Any time there is a communication breakdown between the parties, there is a chance that problems could escalate to the point of litigation.
If you are a San Diego contractor who is facing a lawsuit surrounding work that was done for a homeowner, you should get all of your ducks in line and seek competent legal representation.
Source: Succeed with Contractors, "Construction Contingency May Be a Point of Contention When Building," accessed Nov. 10, 2017