Contingency Procedure

[Robert Ducon]

I’ve never used contingency before. I’m starting a project where 10% contingency equates $500. As I understand it, the reason I ask for this is to save a shoot if something unforeseen occurs, yes?

If by the end I haven’t used that money, it is the norm to return or declare it unused? What’s the normal procedure.. and, the ethical one. Cheers!

[Steve House]

Originally Posted by Robert Ducon

I’ve never used contingency before. I’m starting a project where 10% contingency equates $500. As I understand it, the reason I ask for this is to save a shoot if something unforeseen occurs, yes?

If by the end I haven’t used that money, it is the norm to return or declare it unused? What’s the normal procedure.. and, the ethical one. Cheers!

Just exactly what do you mean by a contingency? Are you saying you have estimated the job as costing in the range of $5000 to $5500? Did you bid the job as a fixed price bid or on a time-and-materials basis?

[Robert Ducon]

Let's say the job costs $5000. Then 10% of that is $500. I see that 10% as backup funds, in case something goes wrong and I need the cash to continue - I've read/seen other examples of people adding 5% to 10% like this, and it makes sense, I think. But it is merely that, reserve funds, set aside simply if something goes wrong, and not used if not needed? Or, as it's included in my final budget, do I just add it in and it's there as part of the lump sum, no matter what?

[Bill Davis]

Originally Posted by Robert Ducon

Let's say the job costs $5000. Then 10% of that is $500. I see that 10% as backup funds, in case something goes wrong and I need the cash to continue - I've read/seen other examples of people adding 5% to 10% like this, and it makes sense, I think. But it is merely that, reserve funds, set aside simply if something goes wrong, and not used if not needed? Or, as it's included in my final budget, do I just add it in and it's there as part of the lump sum, no matter what?

Robert,

In traditional "above the line/below the line" production budgets it was/is common practice to add a contingency factor to some sections of project QUOTES. I still do it and there are probably others who do as well.

Essentially it acknowledges that there's no way to know AHEAD OF THE PROJECT what will happen along the way. And to quote reasponsibly (which is to say with a decent chance that your quote will not "underestimate" the actual cost of the job) adding small contingency percentages to things like production expenses are one way to give a fairer estimation of what a job would really cost.

My formal quote adds between 4% and 6% to various costs that have proven over the years to "creep" up between the estimates and the actual shoots.

It's perfectly fair AS LONG AS YOUR QUOTE EXPLAINS HOW AND WHY YOU APPLY IT.

If you don't then the accounting team will question why your numbers don't add up properly.

It's a long ago convention that I appreciate - particularly since having that mechanism in place means I never have to invoice for a lot of little stuff (gaffers tape, batteries, etc, etc, etc) - nor do I have to worry if I feel, for example, I should take extra half-hour to tweek the edit. If so, the contengency applied to Post covers me.

It's a long time, time traditional budgeting convention in the production industry - tho probably NOT employed these days as often as it once was.

Hope that helps.

[Steve House]

Originally Posted by Robert Ducon

Let's say the job costs $5000. Then 10% of that is $500. I see that 10% as backup funds, in case something goes wrong and I need the cash to continue - I've read/seen other examples of people adding 5% to 10% like this, and it makes sense, I think. But it is merely that, reserve funds, set aside simply if something goes wrong, and not used if not needed? Or, as it's included in my final budget, do I just add it in and it's there as part of the lump sum, no matter what?

I understand where you're coming up with the 500 but how did you bid the job, fixed price or cost-plus? Did you say it will cost between $5000 - $5500 and your contract says you'll deliver the agreed product for $5000 plus overages of no more than $500 REGARDLESSS of actual cost to you or did you contract on a "time and materials basis" where the final cost will be whatever it costs and and you have ESTIMATED that will be $5000 subject to a possible 10% overage? What happens if your total cost is $10,000? Are you obligated to deliver the finished product anyway and can bill the client for no more than $5500, eating the rest yourself? Or do you proceed until the product is done OR until a maximum of $5500 is spent, whichever comes first, and then return to the client for more money, whereupon he has the option of stopping there and taking delivery of the product "as is" or continuing on for the additional cost?

Did your client give you the full $5000 + the $500 in advance or did they give you a $500 deposit that you're holding for the contingency to cover possible cash shortages? If the latter, I'd consider that $500 to be an advance against expenses, held in escrow to be returned or credited towards the bill when the final accounting is done.

[Robert Ducon]

Steve, thanks for your questions; so much detail it's confusing. Evidently I am new to this portion of the job. Obviously it's a little late now, but any suggestions on how things should have been done with knowledge of how this job is going would be appreciated. I didn't have the luxury of someone “showing me the way” at the time…I’ve consulted what books I have available, but undoubtedly experience is what would have come in handy.

The project is set at $5000.00. The contingency is $500.00 additional to that sum, and will be included in payment from the client. It hasn't been specified what it'll be used for other than me verbally citing overages, but when invoicing I can specify where the money will go/will be used for (and I ethically would use it to serve the purpose of a better product for the client). Payment will be in two parts - pre-production and then when postproduction occurs, and I'm going to specify that the contingency be in first part.

The total cost will only ever be $5500.00 (contingency included). If they ask for more changes that go past a certain amount of hours, or ask for things not specified in the contract, those changes will be quoted and the client will decide if they'll pay for them in a new agreement - I'm keeping in contact with them to let them know where everything stands. So it's like what you've said here:

"Or do you proceed until the product is done OR until a maximum of $5500 is spent, whichever comes first, and then return to the client for more money, whereupon he has the option of stopping there and taking delivery of the product "as is" or continuing on for the additional cost."

Guidance?

[Steve House]

Originally Posted by Robert Ducon

Steve, thanks for your questions; so much detail it's confusing. Evidently I am new to this portion of the job. Obviously it's a little late now, but any suggestions on how things should have been done with knowledge of how this job is going would be appreciated. I didn't have the luxury of someone “showing me the way” at the time…I’ve consulted what books I have available, but undoubtedly experience is what would have come in handy.

The project is set at $5000.00. The contingency is $500.00 additional to that sum, and will be included in payment from the client. It hasn't been specified what it'll be used for other than me verbally citing overages, but when invoicing I can specify where the money will go/will be used for (and I ethically would use it to serve the purpose of a better product for the client). Payment will be in two parts - pre-production and then when postproduction occurs, and I'm going to specify that the contingency be in first part.

The total cost will only ever be $5500.00 (contingency included). If they ask for more changes that go past a certain amount of hours, or ask for things not specified in the contract, those changes will be quoted and the client will decide if they'll pay for them in a new agreement - I'm keeping in contact with them to let them know where everything stands. So it's like what you've said here:

"Or do you proceed until the product is done OR until a maximum of $5500 is spent, whichever comes first, and then return to the client for more money, whereupon he has the option of stopping there and taking delivery of the product "as is" or continuing on for the additional cost."

Guidance?

I know what you mean about confusing. My present "day job" is computer application training and my speciality is project management and the MS Project scheduling/budgeting application. In the PM world contracts are generally either on a fixed-price, cost-plus, or time and materials basis.

Fixed price is cut and dried - "I'll deliver a 30 minute pilot program for a fishing series for $25000." And that's that ... if you can actually produce it for $1000, you've made $24000 profit. But if it costs you $50000, there's no going back to the client for more money. You still are contractually obligated to deliver a 30 minute program and the client is obligated to pay you $25000, period ... you'll have to eat the extra $25000 cost out of your own pocket. In that scenario you estimate your costs and add your desired profit margin to come up with your bid. A contingency would be an amount you include in your cost estimate when coming up with the bid and the client likely doesn't even know about it. If you use it, it reduces your profit. If you don't, you keep it.

A cost-plus bid, sometimes called time and materials, is a little different. There you estimate the costs - time based labour costs plus materials and expenses - and bid the job on as estimate of the total amount but the client only pays for the amount actually used. Your profit is included in the rates you charge the client - if your figure your labour is worth is $50 per hour and you anticipate using an average of $25 worth of tape each hour, you might bid to do the job for $75 per hour. But the total cost for the client is based on the actual total hours. If you estimate it'll take 100 hours to do that show, you bid $7500 with an accepted variance of +10%, ie, you tell the client "I expect it will cost between $7500 and $8250." But if you do it in 50 hours, you bill the client $3750. If you do it in 100 hours, you bill $7500. If you take 110 hours, you bill $8250 and the client doesn't get upset because he knew ahead of time it might run that much. OTOH, if you've used 110 hours and you're still not finished, you've got a problem and you'll need to hope your client will continue or you might have to eat the remainder or perhaps he'll pull the plug - it's spelling out what happens then that's just one of the many places where it pays to have a lawyer go over your contracts. But it's important to note that the 10% is NOT a contingency - it's considered an acceptable variance in the actual final cost versus estimated final cost that won't raise any eyebrows. Exceed that and the lawyers might get involved - it all depends on the exact wording of your contract.

It seems like you've got an advance against your billings and that's a good thing - it's always better if you can operate your business using OPM (Other People's Money). But don't mix up an advance with a contingency with a variance in an estimate, they really are very different things from each other.

[Robert Ducon]

Steve, much appreciated. If anything, you've confirmed I'm not that far off in my thinking, but regardless, I'm going to take note of what you've said for the continuation of this contract, as well as any future ones! I hope others have found this thread useful as well.

[Steve House]

Originally Posted by Robert Ducon

Steve, much appreciated. If anything, you've confirmed I'm not that far off in my thinking, but regardless, I'm going to take note of what you've said for the continuation of this contract, as well as any future ones! I hope others have found this thread useful as well.

I should have added that a cost-plus bid and a time-and-materials bid are not quiite the same thing but for our purposes here they're not all that different,