Contractor License Practice Exam

If adding extra funds to cover unexpected costs, these are known as?

1. Unexpected expenses

2. Flex funds

3. Contingency costs

4. Overrun funds

The correct answer is: Contingency costs

The correct answer refers to additional funds set aside in a project budget specifically for unforeseen costs that may arise during the course of a project. These are known as contingency costs. Contingency costs serve as a financial buffer to account for risks and uncertainties that could affect the project’s budget. By including these costs in the initial budgeting process, project managers aim to mitigate the impact of potential overruns, ensuring that the project can proceed without financial strain in the event of unexpected issues, such as price hikes in materials, regulatory changes, or unforeseen site conditions. The other terms in the options generally don’t capture the specific finance management concept associated withsetting aside money for unpredictable expenses. For example, unexpected expenses may refer to costs that arise but don’t necessarily have a proactive budget allocation. Flex funds tends to imply funds that can be shifted or adjusted for various uses rather than specifically reserved for contingencies. Overrun funds suggest costs that have already exceeded the budget, not a reserve for managing risk ahead of time. This understanding highlights the purpose and necessity of planning for uncertainty in construction and project management.