Construction Contingency Playbook: How to Avoid Budget Nightmares

Your construction contingency might not be the most exciting line item in your home renovation budget, but it can save you a lot of money stress 💰 during your project. Let’s talk about how much to set aside, what qualifies as a contingency expense, and when to dip into it.

When it comes to home renovations, things rarely go according to plan. A hidden repair, material delay, or last-minute design change can add hundreds (if not thousands) of dollars to your budget.

My mom and I have renovated a number of investment properties together, and every single one came with a budget curveball. From burst pipes to snow delays and outdated wiring hiding behind the walls…we’ve seen it all.

The good news is you don’t need to predict exactly what will go wrong in your project. You just need enough room in your budget to deal with it when it (inevitably) does.

That’s where your construction contingency comes into play. It keeps one unexpected expense from draining your savings, stalling your timeline, or forcing you to cut the design details you spent months planning.

Still tempted to skip this line item? Here are six reasons a construction contingency belongs in your renovation budget, how much to set aside, and when you should use it.

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 expect to pay during your project’s lifecycle. Emergencies included.

Construction Contingency Definition

Think of your construction contingency as 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 funds are there to cover it. 

Construction Contingency vs Allowance

These two terms get mixed up all the time, but they cover very different costs. An allowance is a placeholder for something you know you need but haven’t picked out yet. Like backsplash tile, bathroom faucets, or light fixtures. Your contractor budgets a set amount, and you settle on the actual cost once you make your selections.

A construction contingency covers the costs you can’t see coming. Think burst pipes, hidden water damage, structural issues, all that fun stuff.

Construction Contingency Clause

A construction contingency clause spells out how much money is allocated to the contingency budget, who controls it, and what counts as an approved use. Without a clause in place, you and your contractor may have very different opinions about who is responsible for covering expensive surprises. Make sure you ask about the construction contingency clause before signing any contracts!

Sizing Your Construction Contingency Percentage

When push comes to shove, you want to ensure you have enough money to cover unexpected expenses. Here’s how to tailor your construction contingency funds to your project.

Construction contingencies are estimated based on the total project cost. The industry-standard construction contingency percentage is between 5% and 15% of the total cost, depending on your home’s size and age, as well as the scope and complexity of your project. 

A new construction project may require a smaller contingency budget than a rehab project, since expenses are more predictable. After all, you never know what you’ll find hiding behind the walls of an older home. It’s always a good idea to keep a little extra in reserve just in case.

Sample Construction Contingency Budget

You don’t need a fancy construction contingency calculator to estimate your project’s emergency fund. Just multiply your total project cost by your construction contingency percentage.

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. 

Case Study: How We Used Our Construction Contingency

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. 

Luckily, this wasn’t our first rodeo. At the beginning of our home renovation, we allocated an additional 5% of our total project cost to cover 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. 

6 Reasons You Need a Construction Contingency in Your Budget

Every home renovation project has unknowns, and most of them happen when you least expect them. Here are the most common construction contingency examples so you’re not caught off guard mid-project.

1. Surprise Expenses Behind the Walls

In all my years of renovating homes, I have never completed a home renovation 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. 

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. 

If you want to learn more about planning for these costs, I created a step-by-step guide on how to build a realistic renovation budget from scratch. Read the post here 👉 How to Build a Home Renovation Budget You Can Stick To.

2. Material Price Fluctuations

Like most goods and services, building materials are susceptible to price changes. They fluctuate in value due to market and economic conditions, and it’s usually not a good thing for your wallet.

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 rise in inflation, or a steady decline in demand can all affect 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. Weather Delays

Mother Nature can be your best friend or biggest enemy during your home renovation. It just takes one blizzard, windstorm, 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. Change Orders

A change order represents a modification to an existing construction contract. Any party to the contract (the contractor, subcontractor, or homeowner) can initiate a change order. But all stakeholders need to be on board before the amendment can be finalized.

Change orders come in all shapes and sizes and can have a big 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

All home renovations must comply with local building codes. They’re there to keep us all safe. 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 stay in compliance. 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.

Of course, the best defense is hiring the right contractor in the first place. If you want to know what to look out for before you sign anything, I covered the biggest warning signs every homeowner needs to know. Read the post here 👉 Hiring a Home Renovation Contractor? Watch Out for These 7 Red Flags.

A Construction Contingency Budget That Expects 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 other unplanned costs that pop up during your project’s lifecycle, the easier it will be to reach 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 unexpected expenses, and start your project with confidence, knowing you have a safety net to fall back on when conditions change.

This post is all about budgeting for a construction contingency!