Contingency
A reserve amount included in an estimate to cover unknown risks and unforeseen costs that arise during construction.
Definition
Contingency is a reserve amount included in a construction estimate or budget to cover unknown risks and unforeseen costs that arise during construction. It is set aside specifically for the unknowns — items that could not have been reasonably estimated upfront because the conditions, design, or risks were not yet defined.
Contingency is distinct from allowance (which covers a known scope at a placeholder price), from waste factor (which covers predictable material overage), and from contractor markup (which is profit and overhead).
How contingency is used in estimating
On a typical commercial project, contingency runs 5 to 10 percent of construction cost early in design, dropping to 3 to 5 percent at construction documents, and to 1 to 3 percent at the start of construction. On heavy renovation, adaptive reuse, and high-risk subsurface projects, contingency may stay at 10 to 15 percent or higher even at construction start. The contingency level should be calibrated to the level of design completeness and the inherent risk in the work.
There are two distinct contingencies on most projects: owner contingency (held by the owner for owner-driven changes and unforeseen conditions) and contractor contingency (held inside the contractor’s bid for execution risk). Sophisticated owners separate these explicitly. Contractor contingency that is not used during the project flows to profit at completion, which gives the contractor an incentive to manage execution risk efficiently.
Setting the right contingency
Conceptual estimate: 10 to 15 percent contingency. Schematic design: 8 to 12 percent. Design development: 5 to 10 percent. Construction documents: 3 to 5 percent. Construction start: 1 to 3 percent. These are starting points — increase contingency for renovation, complex MEP, fast-track schedules, and sites with significant subsurface unknowns. Decrease only when the project is clean, well-defined, and similar to recent successful jobs in the same market.
Frequently asked questions
Q.What is a typical contingency percentage?
5 to 10 percent of construction cost during design, falling to 1 to 3 percent at construction start on a clean project. Renovation and high-risk projects carry higher contingency throughout.
Q.What is the difference between contingency and allowance?
Allowance is a placeholder dollar figure for a defined scope that has not been finalized — it is disclosed in the contract and trued up at completion. Contingency is a reserve for unknown risks across the whole project — it is not tied to any specific scope.
Q.Who controls contingency?
Owner contingency is controlled by the owner; contractor contingency is controlled by the contractor. On GMP contracts there is usually one of each, with explicit rules for how each can be used.
Q.What happens to unused contingency at the end of a project?
Owner contingency typically returns to the owner. Contractor contingency on a lump-sum job becomes contractor profit. On GMP contracts, savings clauses often split unused contingency between owner and contractor based on a pre-agreed ratio.
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