Setting the right contingency budget for your next property development

A contingency budget allows for any unknown risks to be mitigated once they occur. It is made up of a percentage of the overall budget, somewhere between the sliding scale of 5-10%, depending on the size of the project. However, throughout the development, from the preliminary business plan to the elemental cost plan, the percentage may be reduced accordingly once the contract is awarded. It is, therefore, always in everyone’s best interest to gather as much research as possible to be better informed.

Watch Nicholas’ YouTube video, ‘Property Development Contingency Advice! Nicholas’ PM Shares His Expertise&Tips for Mitigating Risk,’ to find out more.

Most project managers, including Nicholas Wallwork’s chief Project Manager Tom Gillett, stick to the rule of 5%. This estimation is usually more than what is needed. But, as mentioned, this can change. For example, the Covid-19 pandemic has heavily impacted contingency measures across the industry. Worksites were temporarily closed at points during the pandemic to reduce the spread of coronavirus, which further affected the contracts of clients and suppliers. Social distancing was introduced as well, which somewhat impacted the day-to-day operations.

Setting the right contingency budget will depend on various factors. These factors can be relevant to the particular project at hand or things that cannot be predicted – such as the pandemic. One individual may jump straight into executing the development and hope everything goes to plan. Another will be smarter by taking the time to estimate how much time is needed to achieve each step, updating their plan as the project progresses. The second person will have a risk-informed discussion with the project sponsor, allowing them to request a justifiable amount of contingency. Once agreed upon, the overall budget will effectively cover everything.

It is, as Nicholas says, “about taking out all of the grey areas, the risk factors, and saying ‘this is how we want it built, this is how you build it, here’s all your specifications from various engineers and here’s how you can price it.’” Having a clear vision and communicating with contractors to ensure they are tendering is the ultimate goal that leads to a smooth development project.

The time to do all of this contingency planning will be prior to the construction taking place. Establishing early doors is the best policy that will see the budget handled appropriately. If done too late, the development will be impacted as a whole, and the overall costs will inflate if anything were to go wrong. In short, it will be better in the long run.

An example of what could go wrong is covered in one of Nicholas’ YouTube videos. Utility companies can charge what they want and when they want while delivering at whatever time suits them! The Rule of Events allows a contractor to apply for more time and costs; despite the fact they are managing the function, they have no control over the utility companies.

Within the building Tom and Nicholas are seen at, they were led to believe a certain amount of power came in. However, when the local electricity company went to check this, they found that the information they gave was incorrect. This then resulted in a substation being built, which subsequently ran into a six-figure number – 60-70% of the contingency budget.

Without their contingency in place, construction may have had to stop temporarily, and more costs may have been needed as a result. So, as can be seen with the likes of these likely problems, a contingency budget must be established. Setting the right one will depend on the funds available, but one thing to remember is that you need to budget for a contingency of at least 5% or more.

Suppose you would like help avoiding the common mistakes that might eat into your precious contingency budget, why not book a mentorship call with Nicholas? A taster session is only £49.99, which will be refunded should you go on to arrange a mentoring package. Nicholas can support you in your property development venture due to his years of first-hand experience. Find out more today.

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