Contingency

What is a Contingency?

A contingency is a percentage or dollar amount added to a project estimate to cover unexpected costs, unforeseen conditions, or scope changes that weren't anticipated during planning. It's essentially a financial cushion that protects both the contractor and client from budget overruns.

Contingency isn't padding or extra profit—it's a realistic acknowledgment that construction projects rarely go exactly as planned.

Why Contingency Matters

For Contractors

• Protects profit margins when surprises occur
• Covers costs that couldn't be predicted
• Reduces need for uncomfortable cost conversations
• Provides flexibility to handle problems quickly

For Clients

• Creates realistic budget expectations
• Reduces sticker shock from change orders
• Ensures funds are available for necessary changes
• Leads to smoother project completion

Types of Contingency

Design Contingency

Covers costs from incomplete designs or specifications that will be refined during construction. Higher when plans are preliminary, decreases as design is finalized.

Typical Range: 5-15% depending on design completion

Construction Contingency

Covers unforeseen site conditions, hidden problems, and construction challenges that emerge during the build.

Typical Range: 5-10% for new construction, 10-20% for renovation

Owner's Contingency

A separate reserve held by the client for upgrades, additions, or changes they may want during construction.

Typical Range: 5-10% of project budget

Escalation Contingency

Accounts for material and labor price increases on longer projects where costs may rise between estimate and purchase.

Typical Range: 2-5% annually on multi-year projects

How Much Contingency to Include

Project Type Guidelines

Factors That Increase Contingency

Age of Building: Older structures hide more surprises.

Limited Access: Walls, ceilings, and underground work have more unknowns.

Complex Systems: Electrical, plumbing, and HVAC work involves hidden conditions.

Site Conditions: Soil, drainage, and foundation work carry higher risk.

Regulatory Risk: Projects requiring variances or complex permitting.

Tight Timeline: Rushed projects leave less time to solve problems efficiently.

Factors That Decrease Contingency

Thorough Pre-Construction: Detailed investigation reduces unknowns.

Experienced Team: Crews who've done similar work anticipate issues.

New Construction: Fewer surprises than renovation work.

Simple Scope: Straightforward projects with standard methods.

Quality Plans: Complete, detailed drawings and specifications.

How to Present Contingency to Clients

Be Transparent

Explain what contingency covers and why it's necessary. Educated clients understand it's not padding.

Show It Separately

List contingency as its own line item rather than hiding it in other costs. This builds trust.

Explain the Range

Help clients understand that contingency may not be fully used—or may be exceeded in rare cases.

Document Usage

When contingency is used, document exactly what it covered. This validates your planning.

Managing Contingency During Projects

Track Carefully

Maintain a running balance of contingency used vs. remaining. Know where you stand at all times.

Get Approval for Usage

Even though contingency is budgeted, communicate with clients before using it for significant items.

Prioritize Spending

Use contingency for true unknowns, not scope additions or upgrades (those should be change orders).

Report Regularly

Include contingency status in progress reports so clients aren't surprised.

Contingency vs. Change Orders

When to Use Contingency

• Hidden structural damage discovered during demo
• Unexpected soil conditions
• Code requirements discovered during inspection
• Minor scope clarifications

When to Use Change Orders

• Client requests additions or upgrades
• Client changes design or materials
• Work outside the original scope
• Significant timeline changes

Common Contingency Mistakes

Too Little: Unrealistic contingency leads to budget overruns and difficult client conversations.

Too Much: Excessive contingency makes your bids uncompetitive and prices clients out.

Not Adjusting: Using the same percentage for all projects ignores risk differences.

Hiding It: Burying contingency in other line items erodes trust when it's needed.

Using It Wrong: Contingency isn't a slush fund for scope creep or estimating errors.

What If Contingency Isn't Used?

Common Approaches

Return to Client: Unused contingency reduces final project cost.

Split Savings: Contractor and client share unused contingency (incentivizes efficiency).

Retain as Profit: Some contracts allow contractor to keep unused contingency.

Apply to Upgrades: Client uses savings for project enhancements.

Contract Clarity

Specify in your contract what happens to unused contingency. This prevents disputes at project end.

The Bottom Line

Contingency isn't about expecting the worst—it's about planning realistically. The right contingency amount reflects the actual risk level of each unique project and protects everyone involved from budget surprises.

Smart contractors adjust contingency based on project type, site conditions, and design completeness. They present it transparently, track it carefully, and use it appropriately when the unexpected inevitably occurs.