Contingency Utilization in Construction Projects: A Psycho-Contractual Approach

Abstract

Although construction industry is risk-averse, a major portfolio of risk is accepted and jointly managed between a client and contractor under cost-plus guaranteed maximum price contract through cost contingency (CC). Other than allocation adequacy, a proper management of these funds is not only vital to financial and schedule targets, it also impacts stakeholder relationships. There is a lack of pragmatic guidelines for CC management, resulting in contractual and managerial conundrums. Also, contingency spending rates are not standardized, causing improper CC utilization. Therefore, this study analyzes the current practices and prevailing conundrums of CC management, along with investigating the behavioral implications of a project manager’s (PM) mental model over CC spending rate. An extensive survey and case studies are used to achieve these objectives. It is found that respondents contradict over key aspects of CC and organizations manage CC through ad-hoc mechanisms. Also, PMs demonstrate lesser aggressive behavior than their passive tendencies, and their majority withholds contingency amount in the first half of the project. The findings highlight conundrums and offer practical guidelines for CC utilization.