Contingency allowances in Montenegro’s investment projects need to reflect engineering uncertainty, construction risks and potential delays, with the appropriate reserve depending on project maturity, contract terms, market conditions and the likelihood of identified risks generating additional costs.
Project budgets should distinguish between established scope and work that remains undefined. Where quantities are still being developed, some costs classified as contingency may actually represent unpriced elements of the base project. Lenders therefore need to examine whether early-stage estimates are being presented as firm capital expenditure (CAPEX) figures supported by reserves that are insufficient for the remaining uncertainty.
Contingency Requirements Depend on Project Characteristics
A permitted solar plant with a mature design, fixed-price equipment and a defined grid connection has a different risk profile from a motorway section involving difficult geology or a brownfield industrial retrofit. These differences mean that a single contingency percentage cannot be applied appropriately across all projects.
The reserve required for each investment depends on the maturity of its design, the structure of its contracts, prevailing market conditions and the probability that identified risks will translate into expenditure.
Construction Delays Create Additional Financing Costs
Schedule contingency is as important as the reserve for direct construction costs. A project may remain within its engineering, procurement and construction (EPC) contract price while losing value because of delays.
Additional exposure can arise from interest during construction, commitment fees, deferred revenue and extended technical supervision. These costs may fall outside the construction contract, requiring financing plans to include sufficient time buffers and liquidity to cover potential overruns.
Market Conditions and Procurement Risks
The simultaneous development of multiple projects in Montenegro could increase prices for labour, contractors and subcontractors. Imported equipment may also be exposed to freight costs, manufacturing-slot availability and currency fluctuations where contracts are not fully denominated in euros. Procurement strategies need to establish which risks are covered by fixed contractual terms and which remain with the project owner. The allocation of these risks affects the contingency required in the project budget.
Risk Registers and Contingency Allocation
For lenders, contingency reserves should be linked to a quantified risk register rather than determined solely by applying a standard percentage to total project costs.
Geotechnical uncertainty, grid dependencies, permit conditions, cost escalation, contractor claims and interface risks can each be assessed through probability and impact ranges. This approach provides a project-specific basis for determining the reserve needed to address potential cost increases.
Controls on Contingency Use
The release and use of contingency funds also require defined controls. The reserve should not be treated as unrestricted cash available to the sponsor. As engineering designs and procurement arrangements mature, individual risks can be resolved, allowing the required reserve to decrease.
During construction, withdrawals should be linked to approved changes and an updated forecast of the risks and costs remaining to complete the project.
Input from the Owner’s Engineer and the lender’s technical adviser is important in reviewing requests for contingency expenditure. Their assessments can help determine whether a cost arises from a genuinely unforeseen event, falls within the contractor’s existing obligations or reflects an incomplete original budget.
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