Legal Q&A: What the Olympic contingency means for the Games

The Olympics budget has been increased to £9.3bn, of which £4.8bn is construction, regeneration and infrastructure cost, and £2.7bn of which is a separate programme contingency. Any construction project involves a balancing act, but it is difficult to conceive of a programme/quality/cost equation more acute than it is for the 2012 Games.

Why is the Olympics a special case?

The Olympic project has an inflexible programme end-date. The identity and order of activities between now and 2012 can be manipulated - but not completion. Because of the need to make progress, construction must begin before the design has been matured. This has been seen before: although the Scottish Parliament was ultimately delayed, budget control was jeopardised because, at the outset, swift delivery of the project was a priority. The budget suffered.

What does this mean for quality?

Quality is an interesting concept in relation to the Olympic project. The government's 2012 Construction Commitments state that design should be "creative, imaginative, sustainable and capable of meeting delivery objectives" and that "visionary designs" are strongly encouraged.

Quality for this project also focuses on sustainability - a critical factor in winning and delivering the Games. Projects are to incorporate best practice in relation to resource use, waste minimisation and low-carbon performance. This agenda reflects political and global dimensions in a way that no previous Games has, but will also affect budget.

And what about the cost?

The programme necessity, and the added focus on quality, means that the budget is under extreme pressure, and is susceptible to change to prioritise the other two. The construction cost is uncertain. In addition to the factors that affect the budget for any construction project, and the demanding time and quality issues, there are further novel features of the Olympics: the possibility of terrorist damage and the sheer scale and complexity of the project, which creates uncertainty in relation to the availability of resources required for delivery - such that limited supply will drive up the cost of labour and materials.

So what is being done to offset this risk?

For all of the above reasons, the core construction budget has a 23% primary contingency built in. In addition to this, Olympics minister Tessa Jowell has confirmed a separate £2.7bn contingency. This is described as a programme contingency, but it was announced that it will be deployed "so as to ensure the timetable is met and quality is maintained". In other words, this contingency appears to provide a fund in respect of both quality and programme. In relation to quality, it may be required in order to satisfy the aspirational benchmarks required of the Olympics. But it is first and foremost tied to programme.

How likely is the contingency fund to be spent?

The concept of a contingency can mean several things. Opinions even differ as to whether it should mean that the project out-turn will include spending the contingency. Is it a fund that experience, and the characteristics of the project, suggest will be required (it is just not known precisely how), or is it an emergency fund, only to be dipped into when the unexpected happens? Jowell has said that the contingency is the latter: that it will be held under "very tight" conditions.

A contingency will typically do two things: achieve a specific confidence level, and allow for evolution or change of the design.

How has the size of the contingency been gauged?

National credibility and pride turn on the ability of the construction and engineering sector to deliver this demanding project to ambitious goals. Success or failure to do so will, in large part, depend on delivery within the allocated budget. If the budget changes too frequently then that may, in itself, mark failure. Confidence in the budget is key, and the contingency must be adequate.

Gauging the contingency has caused much controversy, but this project is different to almost any public or private sector development, so conventional thinking in relation to budget and contingency is likely to be unreliable. Much of the detail of these Games is unknown: what is known suggests a budget that is likely to increase to promote programme and quality.

If the contingency approach is unusual, is that not how it ought to be?

Indeed - it should reflect the challenging project and the government's Games commitment to early risk identification, allocation and management. The government and the Olympic Delivery Authority have pledged to try to avoid construction disputes in relation to the Games. That begins with realism in relation to the effect on budget of the other goals of the project.