Contingency by project stage

Under the word "contingency", a budget often mixes three reserves of a different nature. Distinguishing them means knowing who decides how they are used and when they should disappear.

The first is not, strictly speaking, an unforeseen event. It measures what is not yet known: a sketch design estimate does not have the detail of a measured design. It is meant to disappear once tenders are known, since at that point the price is no longer estimated but offered.

The third is not an unforeseen event at all. A change the client wants is a decision. On the architect's side, the Grand-Ducal Regulation (règlement grand-ducal) of 17 June 1992 provides that any significant change to the brief must be the subject of a supplementary agreement (convention additionnelle) "which shall state its financial impact" (Art. 9, unofficial translation). The client's reserve is the envelope within which these supplementary agreements can be signed without raising the budget. Its place in the architect's agreement is covered in the article on writing the budget into the architect's agreement.

No official Luxembourg recommendation setting a contingency percentage was identified in the sources consulted. Giving a figure would mean presenting a habit as a standard.

A flat percentage above all raises a problem of method. Applying the same rate to a new building on a surveyed plot and to the major refurbishment of an old building makes no sense: the risks are neither of the same nature nor of the same scale. Nor does a rate say when the contingency can be released, since it is tied to no specific risk. Finally, a percentage known to everyone tends to be treated as available. The opposite method is more robust: start from the project's known risks, price each one, and make the contingency the sum of those amounts, possibly topped up with a margin for the general uncertainty of the estimate, itself justified by the stage reached.

A risk register is enough, provided it is kept up to date. For each risk: its description, the stage at which it can be cleared, the estimated amount if it materialises, the measure that reduces it (ground investigation, condition survey, measured survey), and the person responsible for following it.

Fictitious example, given to illustrate the method. At preliminary design (avant-projet) stage, a client settles a works envelope of 1,800,000 euros excluding VAT for a new office building. They identify four risks: ground conditions not yet investigated (60,000 euros), utility connections whose cost is not confirmed (25,000 euros), possible conditions in the building permit concerning the surroundings (20,000 euros), and uncertainty in quantities measured from preliminary design drawings (45,000 euros). The contingency is set at 60,000 + 25,000 + 20,000 + 45,000 = 150,000 euros. Separately, they set their own reserve of 30,000 euros for any changes of specification.

The rest of the example shows the release. Ground investigations carried out during the final design (projet définitif) confirm ordinary ground; the residual risk is brought down to 15,000 euros, which releases 45,000 euros. The network operators confirm the cost of the connections, which is built into the estimate: 25,000 euros are released from the contingency and carried into the estimate. The contingency falls to 150,000 - 45,000 - 25,000 = 80,000 euros. The decision on how to reallocate the 45,000 euros released (reduce the budget, raise a specification, keep a margin) belongs to the client, and it is put in writing.

Each stage removes part of the uncertainty; the contingency must follow. The table describes the nature of the dominant uncertainty, not an amount.

Tendering is the pivotal moment. Once tenders are known, the part of the contingency linked to estimating uncertainty no longer serves any purpose: either the prices are within the envelope or they are not. Using that part to absorb tenders that are too high hides an overrun instead of dealing with it. When the estimate exceeds the budget before tendering, the question is one of trade-offs, covered in the article on the estimate that exceeds the budget.

The contingency is not a line for ancillary costs. Fees, taxes, utility connections and other non-works costs are certain expenses, of which only the amount may be uncertain; they have their own line, set out in the article on ancillary costs and their weight. Putting them in the contingency empties it before the first spade goes into the ground.

Nor is the contingency a cost lever. Specification level, compactness and the choice of systems change the price of the design itself; they belong to design and trade-offs, not to the reserve. These factors are covered in the article on what changes the works cost.

The contingency does not cover general price movements. In a public contract, the final account must show statutory increases (hausses légales) separately where the estimate (devis) or the agreed price is exceeded (amended law of 8 April 2018 on public procurement, Art. 47 (2)). It is therefore consistent to track them in a separate line of the cost dashboard, not in the contingency.

For a contracting authority (pouvoir adjudicateur), the contingency is the reserve that funds changes to a contract in progress. The 2018 law governs these changes in its Article 43: additional works that have become necessary and circumstances that a diligent contracting authority could not foresee, each limited to 50% of the value of the initial contract per change; low-value changes below the European thresholds and below 15% of the initial value for works, as a net cumulative value. The implementing Grand-Ducal Regulation specifies that the change is made by way of an amendment (avenant) (Art. 120).

These ceilings are legal limits, not a budget. An amendment permitted by Article 43 may perfectly well exceed the available appropriations. It is the contingency, voted with the project, that says what the contracting authority can absorb without going back to the body that voted the budget. For a municipality, any later significant departure from the detailed final design must be approved by the municipal council (conseil communal) and the supervisory authority (implementing Grand-Ducal Regulation, Art. 147). The rules on amendments are set out in the article on amendments to a public contract in progress.

Under a lump sum (à forfait), the contractor cannot claim any price increase for higher labour or material costs, nor for changes to the plan that were not authorised in writing and whose price was not agreed with the owner (Civil Code, Art. 1793). The private client's contingency therefore mainly covers what the lump sum does not: their own changes, authorised and priced, and the risks the contract excludes from the lump sum. Reading the contract to find out what is excluded is the first step in sizing it.

One simple rule avoids most drift: the contingency belongs to the client. Neither the architect nor the contractor may commit it without a written decision. Each use is entered in the register with its cause (risk materialised, change decided), its amount and its date. Each release is entered in the same way.

The contingency balance is read against progress. A contingency two-thirds used while the structural works are not yet complete signals that the risks were underestimated, or that changes of brief have been lodged in it. In both cases, the decision rests with the client: reduce a forthcoming item, rebuild the reserve or accept a higher final cost, knowingly.