Contingency in construction is very important for builders and contractors. It is the amount used for unexpected events. These events include design changes and material price increases, or other problems. Contingency acts as a financial protection net that protects the project from surprises. Contingency is important because construction work often involves delays and price changes.
Problems can arise due to design updates and unexpected problems. So contingency allows work to continue smoothly without any serious problem. We will explain the definition and recommended percentage in this article. We will also look at simple calculation methods and best practices for managing contingency in construction.
What is a construction contingency?
Contingency in construction is an amount set aside from the budget to cover unforeseen costs for unexpected events. Contingency is not used for regular expenses. It is used when something sudden or unforeseen happens. Contingency is added in the project at the very start. It is basically done to avoid problems in further stages.
Why does contingency matter in a construction project?
Contingency helps to:
- Protect the budget from unexpected problems.
- Avoid delay caused by a funding shortage.
- Keeps the project moving without constant approvals.
- Reduces financial stress for both client and contractor.
- Supports risk management and smarter decision-making.
Builders also use construction cost estimating services to make sure that the contingency budget is accurate and realistic.
Recommended contingency percentage
There are no fixed rules made for contingency or for how much contingency every project should have. The common ranges are
- 5 to 10% for new construction
- 10 to 20% for renovation
- 3 to 5% for a very large and well-planned commercial project.
Renovation projects need the highest amount of contingency because older buildings often have hidden problems. New buildings usually do not require high contingency because everything is planned and it is made from scratch.
Contingency calculation formula
A simple way to calculate contingency is to use the Contingency Calculation Formula. The formula says that the contingency amount can be calculated by multiplying the total estimated cost by the contingency percentage.
Formula for Contingency
Contingency Amount = Total Estimated Project Cost × Contingency Percentage
Written mathematically:
CA = TEC × CP
Where:
- CA = Contingency Amount
- TEC = Total Estimated Cost
- CP = Contingency Percentage (expressed as a decimal)
Example:
If:
- Total Estimated Cost = $500,000
- Contingency Percentage = 10% (0.10)
Contingency Amount = 500,000 × 0.10 = $50,000
Total Project Cost Including Contingency:
Total Project Cost = Estimated Cost + Contingency Amount
This formula is widely used because it’s simple, transparent, and acceptable in:
- Preliminary estimates
- Budget-level estimates
- Conceptual & schematic design phases
For more advanced estimates, contingency may also be calculated using risk-based methods, but this formula is 100% valid for standard estimating practice.
Types of contingency in construction
There are two types of contingency in construction:
Owner contingency:
This is the amount set aside by the client or the owner. It is for a design change or an unexpected upgrade owner is responsible for.
Contractor contingency:
This is added by the contractor. It includes any minor damage or material shortage.
Both types are added to keep the project safe from surprises.
What contingency should be used for
Contingency should only be used for situations that could not be predicted earlier. Some proper uses include:
- hidden structural damages discovered during real renovation
- price increase in material after the project starts
- unexpected site conditions
- design changes required by safety codes
- Extra labor is needed due to delays or weather issues.
What contingency should not be used for
Contingencies should not be misused. It should not be used for:
- Poor planning
- Mistakes that could have been avoided
- Upgrades requested by a client without approval
- Regular expenses are already included in the budget.
Misuse of contingency early can create problems later. Contingency charges in construction should be set to avoid surprises on further stages.
How estimators support contingency planning
Contingency works better when estimates are accurate. Many contractors take professional help to control risk and improve budgeting. A construction estimating company is hired to prepare a detailed breakdown that can control risks. It makes sure that contingency is only used for covering unknown risks.
Managing contingency throughout the project
Good management is important to make sure that contingency is used correctly and remains available when ended. Some best practices include:
keep clear records
Keep a record by writing the contingency budget used on each step of the construction.
review progress regularly
It involves checking the budget on every stage to decide whether the remaining contingency is enough.
avoid unnecessary spending
Only real surprises should use contingency, and no convenience spending should be done.
communicate with the team
The client and contractor should know how much contingency is remaining and how it is being used.
Update contingency as needed
If you see risks at the start, try to adjust the contingency amount earlier. It can help you make your budget stay realistic.
Common mistakes to avoid
Some mistakes should be avoided for the effectiveness of contingency. such as:
- Setting the percentage too low.
- Using the contingency for planned expenses.
- Not tracking how much is left.
- Ignoring the early signs of the cost increases.
- Failing to update the budget during the project.
Conclusion
Contingency in construction is a very powerful tool that protects the project from unexpected costs. You can make your project smooth by choosing a realistic percentage and following best practices. You can also make your project work better by using a proper calculation formula. All these can be done by taking help from different estimation companies. Contingency becomes a shield for your project and keeps construction work stable and stress-free.
