Contingency allowance

A contingency allowance is an amount of money held in a construction or procurement budget to cover risks and uncertainty — work that turns out to be harder, dirtier or more expensive than the estimate assumed. It sits in the buyer's (owner's) budget, not in the contractor's price, and it is drawn down only against actual, approved costs.

What it is

Treasury Board's Guideline on Cost Estimation for Capital Asset Acquisitions defines contingency as "an amount that is based on the risk and uncertainty inherent in acquiring a capital asset and that is added to a point estimate to provide a risk-adjusted cost estimate," and states plainly that "a contingency is not used to account for changes in the project's approved scope." The same guideline tells departments that cost estimates should provide at least a 50-per-cent confidence level, with contingency added to the point estimate to reflect the risks and the desired confidence — so in federal practice, contingency is a risk-pricing tool, not a slush fund.

In construction tendering, the contingency allowance appears as a concrete tender form item: federal and Crown tenders (a Canada Mortgage and Housing Corporation tender on CanadaBuys is one example) ask tenderers to carry a separate "Contingency Allowance" line, with the total adjusted up or down based on actual work required, as approved by the owner's consultant. The money is released only against real, approved work — usually through change orders — and any unspent balance stays with the owner rather than becoming contractor profit.

How funding programs treat it

Contingency is treated differently depending on who holds it. Transport Canada's Trade Diversification Corridors Fund applicant guide expects applicants' cost estimates to include "a contingency allowance, if applicable (for example, 15 to 20%)" alongside a statement that the organization will cover any cost overruns. By contrast, the Post-Secondary Institutions Strategic Investment Fund FAQ rules that blanket "contingency/allowance/escalation items (i.e. 10% of construction costs)" are not eligible for program funding — program money pays for defined work, and contingency belongs to the proponent's own share.

What it means for vendors

When a tender carries a contingency allowance line, price it as a real estimate of probable extra work, because the owner will only approve draw-downs it can justify. Do not treat it as hidden margin: low-balling the base price and inflating the contingency is visible, and consultants approve each draw-down against actual work. As a subcontractor or consultant, also know whose contingency you are billing against — owner-held contingency is released through change orders, not through routine invoices.

Common questions

Is a contingency allowance the same as a cash allowance?

No. A cash allowance (in standard construction contracts) is a specific dollar amount for defined work whose exact scope is unknown at tender time, included in the contract price. A contingency allowance sits above the contract price in the owner's budget as protection against estimating uncertainty and is not part of the tendered amount.

Can contingency pay for scope changes?

No — for federal capital acquisitions Treasury Board's guideline is explicit that contingency is not used to account for changes in the project's approved scope. Scope changes go through the approval and change-control process instead.

Who keeps unspent contingency?

The owner. Contingency is the buyer's risk provision: if the risks do not materialize, the money is simply not spent, which is why buyers resist bids that treat it as guaranteed revenue.

Related definitions

Change order · Unit price vs. lump sum contracts · CCDC documents · Substantial performance