Contingency allowance, insurance and guarantees: why they are added and how to calculate them
A contingency allowance, batzam in Hebrew (an abbreviation of "unforeseen in advance"), is a percentage item added to the pricing or to the bill of quantities (BOQ) to cover work and costs that cannot be seen in advance. In contractors' pricing it is usually about 2%, and next to it sit more percentage items: contractor's all risks insurance, guarantees, overheads and profit. I have experience in calculating all these additions in bills of quantities and in cost calculations, from the contractor's side and from the client's side.
Why a contingency allowance is in almost every price
Even a good bill of quantities does not see everything. There is a detail that was not drawn, a coordination fix between consultants, a small deviation in quantity, an auxiliary material that did not get an item. Without an item like this, every small thing turns into an argument about a variation. So a fixed percentage is added to cover what is within the scope and is not yet visible in the drawings.
Three things it is not: it is not a reserve for changes the client will ask for, it is not a substitute for index linkage (the adjustment of contract amounts to a price index), and it does not cover real variations. The rate depends on the stage: in a contractor's pricing on detailed drawings about 2% is usual; in an early cost estimate, when the design is still open, the reserve is larger. In my final project, at a stage when the design was not yet closed, I took a contingency of 5% of the project cost, within the company overheads. In Hebrew it appears in several forms: batzam or baltzam, with or without the abbreviation mark, or the plain words for "unforeseen items" or "reserve".
The percentage additions in one table
| Addition | Illustrative rate | Basis of calculation | Source of the number |
|---|---|---|---|
| Contingency allowance | About 2% | Direct cost or the BOQ total | Usual in contractors' pricing; more at an early stage |
| Contractor's all risks insurance | About 0.3% to 0.7% | Value of the works | A review from 2022; today, by an insurance broker's quote |
| Performance guarantee | Annual fee on the guarantee amount | Guarantee rate set in the contract | With the bank |
| Site overheads | 14.5% in my final project | By construction months | Monthly calculation |
| Company overheads | 10.3% in my final project | Including a 5% contingency | Spread of the office expenses |
| Profit | 10% | Of the price, that is dividing by 0.9 | The contractor's policy |
Contractor's all risks insurance: three sections
The policy is usually built from three sections: property cover, that is damage to the works themselves and to the materials on site; liability to third parties, for example damage to neighbours or to passers-by; and employer's liability towards the workers. On top of them come extensions, such as earthquake, or damage to adjacent property or to underground infrastructure. Many tenders include an insurance appendix with the required limits of liability, and the contractor has to price accordingly.
According to a review published in 2022, on projects of up to 80 million shekels the average premium was about 0.28% to 0.35% of the project value in 2019, and it rose to about 0.65%; on larger projects a range of 0.35% to 1.35% was reported. The deductibles rose as well. This is old data, so the price on your project is set only by an insurance broker's quote. In my final project the insurance went into the site overheads as a monthly amount; today I would calculate it as a percentage of the value of the works.
Guarantees: performance, defects liability and advance payment
A performance guarantee gives the client cover if the work is not completed, a defects-liability guarantee covers the defects-liability period after handover, and an advance-payment guarantee protects money paid in advance. These are bank guarantees, and the cost to the contractor is the bank's fee: the guarantee amount, times the annual fee, times the guarantee period in years. An example for illustration: a contract of 10,000,000 shekels and a performance guarantee of 5%, that is 500,000; a fee of 1.5% a year for a year and a half gives 11,250 shekels, about 0.11% of the contract. Banks' tariff lists show maximum rates of a few percent a year, and the actual rate is set with the bank.
The order of calculation: percentage on percentage
The additions are not added up, they are multiplied. So the order and the basis change the result. As an illustration, a direct cost of 1,000,000 shekels:
| Step | Calculation | Running total |
|---|---|---|
| Direct cost | From the BOQ and the inputs | 1,000,000 |
| Contingency 2% | times 1.02 | 1,020,000 |
| Insurance 0.5% | times 1.005 | 1,025,100 |
| Guarantees 0.1% | times 1.001 | 1,026,125 |
| Overheads 12% | times 1.12 | 1,149,260 |
| Profit 10% of the price | divided by 0.9 | 1,276,956 |
A simple sum of the percentages gives 24.6%, that is 1,246,000. The chain gives about 27.7%, almost 31,000 shekels more. Where the overheads themselves come in is on the page site overheads, and how they affect the price of a m³ of concrete on the page concrete frame cost.
The rule: every percentage addition needs a written basis: what it is calculated on, and in what order. Two percent on the wrong basis is already a different number.
The contingency allowance and the insurance are calculated as a percentage, so they depend on a good quantity takeoff. A quantity surveyor who leaves lines open without a quantity increases the need for such an addition, and a full quantity takeoff reduces it.
Frequently asked questions
What is the difference between a contingency allowance and a reserve for changes?
The contingency allowance covers things within the scope that have not been seen yet. A reserve for changes is the client's money for changes he will ask for, and it is not part of the contractor's price. The difference from variations is on the page construction variations.
Does a contingency allowance go into a tender BOQ?
Sometimes. In bills of quantities for residential projects it appears as a lump-sum item in the general chapter, alongside insurance, a performance guarantee and profit. In other cases it stays inside the unit rates.
How much does contractor's all risks insurance cost?
According to the 2022 review, a few tenths of a percent of the project value, depending on the size, the type of work and the deductibles. The real number comes from a quote.
Who calculates all this?
Whoever builds the cost estimate, and usually a quantity surveyor for construction projects. The full structure of a cost estimate is on the page construction cost estimate.
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Contact me for a quote* Created with AI for marketing, for illustration only. Not reviewed by Yaakov Avital and not professional advice. Every project must be checked on its own by a professional quantity surveyor and an engineer.