What Is Contingency in Construction?

February 6, 2024

The answer to the question, “what is contingency in construction?” can be complicated. A general definition is that it’s money set aside in the project budget to cover costs and risks unforeseen during construction. But the ways that it’s calculated and managed can vary significantly between projects.

Adding contingency to your budget ensures you’ll have funds in place to prevent costly surprises and stay on schedule. This is important, especially on large and complex building projects. Without it, even a small issue could send the project over budget.

For example, if your remodel involves repairing extensive water damage to the basement ceiling, you may need to pay for expensive new materials or additional labor hours to complete the work. These issues are unpredictable and a builder would typically be forced to cut other costs to meet project commitments without the protection of contingency funds.

Builders often include contractor contingency when developing their initial project budget estimates. This allows them to take into account the estimated prices of subcontractors and vendors and adjust accordingly for unforeseen costs once construction starts.

Another popular type of contingency is the owner’s contingency. This is used in guaranteed maximum price (GMP) contracts and helps clients manage costs if they decide to add an extra room or upgrade an existing space.

It’s also important to set a clear method of managing unspent contingency funds from the start of a project. Otherwise, deciding how to handle leftover funds will create confusion and potential conflicts.

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