Contingency

Contingency is a budget line for things that have not gone wrong yet. Soil conditions differ from the survey, a material price jumps between bid and order, a subcontractor fails, a code inspector requires a change, a winter is unusually wet. Experienced developers know some of these will happen without knowing which, so they set aside a percentage of the budget in advance. Lenders typically require a contingency as a condition of the construction loan and control its release.

There are usually several layers. The general contractor may carry a contingency inside its price for issues within its scope. The owner carries a separate contingency for changes the contractor is not responsible for, such as design revisions or unforeseen site conditions. Some budgets add a soft-cost contingency for permitting delays and extra consultant fees.

Contingency is a real cost of housing even when it is not spent, because the money must be raised and, if borrowed, committed in advance. In our illustrative building we fold financing costs and contingency together at $1,200,000 of a $24,000,000 budget. If the contingency goes unused, it lowers the final cost; if it is exhausted, the developer covers the overrun from equity or from a guaranty.

The size of the contingency reflects how uncertain a project is. A brownfield site, an untested building type, or a jurisdiction with unpredictable review earns a larger contingency, and that larger reserve is part of what the building must eventually repay through rent.