A construction contingency is the amount of money allocated to pay additional or unexpected costs during the construction project. Usually, a calculation of 5 to 10% of the construction budget should be allocated to your construction contingency. Home builders and remodelers typically allocate between 5% and 10% of a project budget for a construction contingency. This amount creates enough space for unexpected expenses.
Anyone who keeps track of estimates and costs manually calculates a contingency percentage on all costs, before profit margins are applied. Whether made on paper or calculated by hand, these methods offer familiar and accessible estimation options that put budgets and proposals in the hands of customers. However, any price negotiation or recalculation requires careful monitoring and risks human error. In deterministic methods, contingency is estimated as a predetermined percentage of the base cost depending on the phase of the project.
In addition to a contingency, the customer is likely to maintain retention. Withholding is a percentage (often 5%) of the amount certified as owed to the contractor on an interim certificate, which is deducted from the amount owed and withheld by the customer. The purpose of retention is to ensure that the contractor adequately completes the activities required of him under the contract. Retention can also be applied to nominated subcontractors, and the main contractor can also apply retention to domestic subcontractors.
The design contingency is usually up to 10% of the total construction cost. Although calculated and identified separately, the contingency amount must be an additional amount held by the owner in the project budget. The owner maintains the budget and retains it for use by the architect and designers to ensure that the entire desired scope is covered. A contingency fund for construction is not the same as retention, but the concepts are similar.
Both retention and contingency provide what are essentially “emergency funds”. When something in the project goes wrong and costs some extra money, the payment to fix the problem may come from the contingency fund or it may come from withholding the contractor or subcontractor who created the problem. In addition, retention and contingency represent between 5 and 10% of the construction price.