Construction Contingency: How Much Is Enough?
Construction contingency is the budget reserve for unforeseen conditions, scope gaps, and unknowns that emerge during project execution. Too little contingency means budget overruns and crisis management. Too much means over-allocated capital that could fund other projects. Getting contingency right requires understanding project risks and matching reserves to actual uncertainty.
What Contingency Covers
Contingency isn't a slush fund—it's a risk reserve for specific types of unforeseen items.
Appropriate contingency uses:
- Unforeseen site conditions (hidden damage, different conditions than expected)
- Design clarifications and gaps
- Regulatory requirements discovered during execution
- Material substitutions required by availability
- Coordination issues between trades
- Minor scope gaps in original documents
Not appropriate for contingency:
- Owner-requested scope additions
- Upgrades beyond original intent
- Wishlist items discovered during construction
- Scope that should have been included originally
- Bidding errors or contractor underpricing
The distinction matters: contingency is for unknowns, not changes.
Contingency Guidelines by Project Type
Renovation Projects
Renovation work involves existing conditions that may differ from expectations.
Standard renovation (known building, clear scope): 10-15%
- Familiar building with documented conditions
- Complete design documents
- Pre-construction investigation performed
- Experienced contractor
Complex renovation (unknown conditions): 15-25%
- Older building
- Limited existing documentation
- Concealed conditions not fully investigated
- Complex systems integration
- Historic or unusual construction
Gut renovation (significant unknowns): 20-30%
- Major demolition exposing unknown conditions
- Structural modifications
- Hazardous materials potential
- Minimal existing documentation
New Construction
New construction has fewer unknowns but isn't risk-free.
Standard new construction: 5-10%
- Complete design
- Typical site conditions
- Standard construction methods
- Experienced team
Complex new construction: 10-15%
- Unusual design features
- Challenging site conditions
- New technologies or methods
- Accelerated schedule
Specific Project Types
HVAC replacement: 10-15%
- Existing ductwork conditions
- Electrical capacity questions
- Access and coordination issues
Roof replacement: 10-15%
- Deck condition unknowns
- Drainage issues
- Insulation requirements
Tenant improvement: 10-15%
- Base building condition
- Coordination with building systems
- Code compliance surprises
Common area renovation: 15-20%
- Working in occupied building
- Hidden MEP routing
- Phasing complications
Factors Affecting Contingency Sizing
Increases Contingency Need
Building characteristics:
- Older buildings (more unknowns)
- Poor or missing documentation
- Previous modifications (especially unpermitted)
- Unusual construction methods
- Hazardous material risk
Scope characteristics:
- Complex systems integration
- Work in concealed spaces
- Demolition exposing unknowns
- Tight tolerances or custom work
- Regulatory complexity
Process factors:
- Limited pre-construction investigation
- Incomplete design at contract
- Aggressive schedule
- Unfamiliar contractors
Decreases Contingency Need
Building characteristics:
- Newer construction
- Good documentation
- Recent similar projects in building
- Standard construction
Scope characteristics:
- Surface work only (no concealed conditions)
- Simple scope clearly defined
- Repetitive work
- Standard materials and methods
Process factors:
- Thorough pre-construction investigation
- Complete design documents
- Adequate schedule
- Experienced team with building knowledge
Types of Contingency
Owner Contingency
Held by owner for unforeseen conditions, scope gaps, and owner-directed changes.
Characteristics:
- Not part of contractor's contract
- Owner controls use
- Available for true unknowns and owner decisions
- Typically 5-15% of construction cost
Contractor Contingency
Included in contractor's price for their risks.
Characteristics:
- Part of contract amount
- Contractor controls use
- Covers contractor's pricing risk
- May be in GMP structure or built into lump sum
Design Contingency
Held during design development before construction pricing.
Characteristics:
- Accounts for incomplete design
- Reduces as design completes
- Should be near zero before construction bidding
- Typically 10-20% during schematic design
Managing Contingency
Establish Clear Policies
Define contingency management rules before project starts.
Policy elements:
- What constitutes valid contingency use
- Approval requirements by amount
- Documentation requirements
- Reporting frequency
- Treatment at project end
Track and Report
Monitor contingency status throughout the project.
Tracking elements:
- Original contingency amount
- Amounts committed to changes
- Amounts spent
- Remaining contingency
- Projected needs for remainder of project
Reporting:
- Weekly or bi-weekly status updates
- Trend analysis (burning too fast?)
- Forecast of sufficiency
Avoid Common Mistakes
Using contingency for scope additions:
Owner-requested extras should be funded separately, not from contingency.
Spending contingency "because it's there":
Unspent contingency should return to owner, not find a home in unnecessary work.
Inadequate documentation:
Every contingency draw should be justified and documented as unforeseen.
Not adjusting as information improves:
As project progresses and uncertainty decreases, expected contingency needs should clarify.
When Contingency Runs Short
Despite best efforts, contingency sometimes isn't enough.
Options when facing shortfall:
Value engineering:
- Reduce scope or specifications
- Find cost-effective alternatives
- Defer non-critical elements
Budget reallocation:
- Transfer from other project budgets
- Reduce other planned work
Seek additional funding:
- Request budget increase
- Draw from portfolio reserves
Scope reduction:
- Eliminate lowest-priority elements
- Phase work for future completion
Early recognition of potential shortfall enables more options.
Handling Unused Contingency
Return to capital budget:
Most appropriate—funds other priorities.
Accelerate future work:
If current project can beneficially expand scope.
Add to reserves:
Build capital reserves for future needs.
Don't:
- Spend on nice-to-haves just to use it
- Let contractor "find" ways to spend it
- Carry forward on books indefinitely
Clear policy on unused contingency prevents end-of-project waste.
Contingency in Different Contract Types
Lump Sum Contracts
- Contractor carries their own contingency in price
- Owner contingency is separate from contract
- Change orders for unforeseen conditions negotiated
- Clearer separation between contractor and owner risk
GMP Contracts
- Contingency often explicitly identified in GMP
- May be "owner contingency" within GMP structure
- Savings sharing applies to unspent contingency
- More transparency but more complexity
Cost-Plus Contracts
- No contractor contingency—actual costs reimbursed
- All contingency effectively owner's
- Maximum exposure if no cap
- Requires close cost monitoring
Frequently Asked Questions
Should contingency be shown in budget or hidden?
Show it clearly. Hidden contingency creates false precision and complicates reporting. Label it as contingency with clear purpose.
What if my organization caps contingency at 5%?
If policy limits contingency below appropriate levels, document the resulting risk. Track whether projects consistently overrun and use data to advocate for policy change.
Can I reduce contingency as project progresses?
Yes, as unknowns are resolved, contingency need decreases. Release to budget or reallocate when confident remaining risk is covered.
How do I know if contingency was sized correctly?
Post-project, compare contingency to actual unforeseen costs. Consistent under-use suggests over-sizing; consistent overruns suggest under-sizing. Track across projects to calibrate.
Key Takeaways
- Contingency covers unforeseen conditions, not scope changes
- Size contingency based on project-specific risks (10-25% typical for renovation)
- Factors like building age, documentation, and investigation affect appropriate level
- Establish clear policies for use, approval, and reporting
- Track status and trends throughout the project
- Handle unused contingency deliberately—don't waste it
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