Construction Contingency Playbook: How to Avoid Budget Nightmares
Your construction contingency is probably the most underrated line item in your home renovation budget. But (spoiler alert) it’s actually the most important. In this blog post, I’m breaking down why you need this *life-saving* line item in your budget, how much money you should save up, and when to use it.
When it comes to home renovations, it’s never if something goes wrong. It’s when. Unexpected costs come with the territory. The moment you start opening walls, sourcing materials, and hiring contractors, new expenses will always pop up.
Those who prepare for these extra costs make it out in one piece. And those who don’t…well…they probably won’t make that mistake twice. Speaking from experience.
Here’s the hard truth: You can spend months planning every step of your home renovation, from demolition to completion, but there will always be unknowns. Your budget and timeline will stretch in ways you can’t predict, so it’s better to take a proactive approach today rather than scrambling to save your project tomorrow.
If you’re still doubting whether you need a construction contingency budget for your home renovation project, here are the six mains reasons why you should reconsider.
But First, What’s a Construction Contingency?
Your home renovation budget is much more than just material and labor costs. It covers every expense you can reasonably expect to pay during your project’s lifecycle. Emergencies included.
Keep your renovation budget on track and your project schedule on time with a well-funded construction contingency that expects the unexpected.
Construction Contingency Definition
A construction contingency is the safety net of your home renovation budget. Its sole purpose is to cover unexpected costs or problems that arise during your project’s lifecycle. Structural issues, asbestos, water leaks, you name it. The construction contingency is there to cover those unplanned costs.
This is what separates the newbies from the pros.
A Construction Contingency Plan in Action
Let me paint a picture for you. Back in 2023, my mom and I were renovating our third investment property in the dead of winter. The timeline was progressing as expected, and our budget was balanced.
Then, one morning, we arrived at the house to find water all over the first floor. We panicked. The frigid New England weather caused a pipe to burst in the ceiling, damaging our floors, drywall, and plumbing. The water damage was traumatizing, sure, but our real concern was the cost.
Increased expenses lead to project delays, delays lead to higher carrying costs, and higher costs create a funding gap. Unless you have a construction contingency plan.
Luckily, this wasn’t our first rodeo. At the outset of our home renovation, we allocated an additional 5% of our total project cost to cover any unexpected expenses. That meant we had liquid funds available to pay for repairs, saving days (if not weeks) of delays and added costs.
What could’ve been a complete nightmare turned out to be a minor hiccup in our project. This is why a construction contingency plan is so essential in your home renovation budget. It will catch you when you fall, and keep your project moving forward.
Sizing Your Construction Contingency
When push comes to shove, you want to ensure you have enough money to cover the unexpected expenses that pop up. Here’s how to tailor your contingency to your project.
Construction contingencies are estimated based on the total project cost. The industry standard range is between 5-15% of the total cost, depending on the size and age of your home, as well as the scope and complexity of your project.
A new construction project may need a smaller contingency budget than a rehab project, since expenses are more predictable. After all, you never know what you’re going to find behind the walls of an older home. It’s always a good idea to keep a little extra in reserve just in case.
Let’s say you’re renovating the kitchen and bathrooms in your 1980s home, and the total project cost is $85,000. Because it’s an older home, you’ll want to budget at least 10% ($8,500) to 15% ($12,750) for your construction contingency. This will give you some breathing room to cover costs as they arise without losing momentum.
The 6 Most Common Reasons You Need a Construction Contingency
Every home renovation project has unknowns, and most of them happen when you least expect them. Here are the most common use cases for your construction contingency so you’re not caught off guard.
1. Surprise Expenses Behind the Walls
In all my years of renovating homes, I have never completed a home renovation project without a surprise expense. I don’t even think it’s possible.
Whether it’s outdated wiring that doesn’t meet current electrical code, leaking gas lines that need full replacement, or framing issues that have somehow gone unnoticed for decades, there’s always something unfortunate hiding behind the walls.
RELATED POST: How to Build a Home Renovation Budget You Can Stick To
I’m not saying this to scare you, just to warn you. Having an appropriately-sized construction contingency budget in place will save you from scrambling to cover these scary surprises. Save yourself the stress headaches and plan ahead.
2. Material Price Fluctuations
Like most goods and services, building materials are susceptible to price changes. They fluctuate in value as a result of market and economic conditions, and it’s usually not in your favor.
Let’s take a look at lumber prices during the COVID-19 pandemic. The surge in demand for lumber, combined with supply constraints, drove prices up by 162% from the end of 2019 to the beginning of 2021. The National Association of Home Builders estimated that lumber alone added approximately $24,000 to the cost of single-family homes.
Unforeseen supply chain disruptions, a sudden increase in inflation, or a steady drop in demand can all influence the cost of your building materials. You may start your project with a budget that accounts for the current cost of materials, but what happens if those prices increase mid-project? Having a contingency can help cover these price fluctuations and keep your project on track.
3. Unpredictable Weather Delays
Mother Nature can be your best friend or worst nightmare during your home renovation. It just takes one blizzard, wind storm, or torrential downpour to change the trajectory of your project.
As Massachusetts-based home renovators, we’re no strangers to snow. But it got the best of us in 2022. Our second home renovation was delayed by months due to extreme winter conditions. Snow came down like clockwork each week, preventing our contractors from finishing the roof and siding.
Thankfully, we hadn’t touched our 10% construction contingency budget yet, so we were able to cover the additional carrying costs associated with the delayed schedule. As stressful as those delays were, we could breathe easy knowing we had a construction contingency budget to carry us through those cold, unforgiving winter months.
4. Construction Change Orders
A change order represents a modification to an existing construction contract. Any party to the contract, whether the contractor, subcontractor, or homeowner, can initiate a change order. But a sign-off is required from all stakeholders before the amendment can be finalized.
Change orders come in all shapes and sizes, and can have a material impact on your budget. It’s essential to have a construction contingency to absorb any cost increases associated with a change order.
5. Code Violations & Fines
All home renovations must comply with local building codes. Each jurisdiction has different codes and fines, so you and your contractor must take a proactive approach to stay in compliance. If you discover that your project violates these codes, you’ll need to make changes to bring the home up to code.
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These updates can be expensive, and code violation fines will only add to your costs. Having a construction contingency allows you to respond quickly to these changes and keep your project on track.
6. Contractor Mistakes
Human error is inevitable. Your carpenter might get his measurements off by an inch, or your electrician could install the wrong fixture. These things happen. But fixing these mistakes takes time and money.
Having a contingency can help you cover these costs and prevent a minor mistake from becoming a major problem.
How to Expect the Unexpected
The only constant in home renovations is change. The more adaptable you and your budget are to fluctuations in material prices, unexpected change orders, surprise code violations, inevitable contractor errors, and all the other unplanned costs that pop up during your project’s lifecycle, the easier it will be to get to the finish line.
So take your time establishing a realistic home renovation budget before you sign a construction contract, allocate an additional 5-15% of the total project cost for surprise expenses, and start your project with confidence knowing that you have a safety net to fall on when conditions change.
This post is all about the importance of budgeting for a construction contingency.
