Construction Contingency: How Much You Need and Who Controls It
Updated: Sep 20
Contingency is the most misunderstood line in a construction budget. Owners treat it as padding, boards treat it as fat to be trimmed, and contractors treat it as somebody else's money. All three views cause the same outcome: the contingency is too small, it is spent too early, and nobody can explain where it went.
Construction contingency is not a slush fund and it is not optimism insurance. It is a priced allowance for risks you know exist but cannot yet describe. Here is how much you actually need, and who should hold it.
The three contingencies that get confused with each other
Design contingency
Carried inside the estimate to cover detail that has not been designed yet. It shrinks as the design resolves, and by tender it should be close to zero. If your estimator is still carrying ten per cent design contingency on a tender-ready set, something has not been drawn.
Construction contingency
Carried after contract award for things that emerge during construction: unknown conditions, coordination issues, minor scope adjustments. This is the one people usually mean.
Owner contingency
Held by you, outside the contract, for owner-driven changes and the costs nobody puts on a construction budget: extra consultant time, additional testing, moving costs, technology, delayed occupancy. This is the one owners most often forget to carry at all.
How much construction contingency you actually need
The honest answer is that it depends on how much you know, which is the same answer as for estimates. As a working guide for commercial work in Canada:
New construction, complete design, familiar building type: five per cent is defensible.
New construction with unusual systems or a compressed schedule: seven to ten per cent.
Renovation of a building constructed in the last twenty years with good documentation: ten per cent.
Renovation of an older building, or any project where you cannot open walls before pricing: fifteen per cent, and do not let anyone talk you below it.
Heritage, hazardous materials, or an occupied building that cannot stop operating: fifteen to twenty per cent, plus a separate owner contingency.
Those are ranges for the construction contingency alone. Owner contingency sits on top, typically another five per cent of the total project cost, and it is the money that keeps a small surprise from becoming a funding request.
Who should control the money
This is where most of the damage is done. If the contingency sits inside the contractor's contract price with no governance, it tends to get spent. If it sits with the owner with no delegation, every twenty-dollar decision goes to a committee and the schedule pays for it.
The arrangement that works is a written drawdown protocol agreed before construction starts. Define who may authorise spending against contingency and up to what value. Define what qualifies: unknown conditions and coordination, yes; owner-driven scope changes, no, those come from owner contingency. Require that every drawdown is logged with a date, an amount, a cause and a running balance. And review the balance at every progress meeting, not at the end.
The discipline that matters most is simple. Contingency spent is not contingency earned back. A project that has burned sixty per cent of its contingency at thirty per cent completion is telling you something, and the time to act on that signal is immediately.
What contingency is not for
It is not for scope you decided you wanted after the fact. It is not for a design the consultant should have completed. It is not for escalation you knew was coming and chose not to price. And it is not a negotiating buffer to be revealed at the end. Every one of those uses trains the team to treat the number as free money, and the real unknown condition always arrives later.
The questions to settle before construction starts
How much construction contingency is carried, and is it inside or outside the contract price?
Do I also have an owner contingency, and is it in the funding approval?
Who authorises a drawdown, and up to what value without escalation?
What is explicitly eligible and ineligible?
How is the running balance reported, and how often?
What happens to unspent contingency at the end?
That last question is worth asking out loud. On a stipulated price contract, unspent contingency inside the contractor's price usually stays with the contractor. On a cost-plus or construction management arrangement, it usually returns to you. Knowing which one you have changes how you think about every drawdown.
The honest summary
Construction contingency is a governance question disguised as a budget line. The right amount depends on how much you know about the building, and the right control depends on writing down who can spend it and on what before anyone wants to. Owners who do both rarely have a contingency crisis. Owners who do neither almost always do.
Common questions about construction contingency
How much construction contingency do I need?
It depends on how much you know about the building. Five per cent for new construction with a complete design, seven to ten for unusual systems or a compressed schedule, ten for a renovation of a well-documented modern building, fifteen for an older building you cannot open before pricing, and fifteen to twenty for heritage, hazardous materials or a building that has to keep operating.
What is the difference between design, construction and owner contingency?
Design contingency sits inside the estimate and shrinks as the drawings resolve. Construction contingency is carried after award for what emerges on site. Owner contingency is yours, held outside the contract, for changes you decide on and the costs nobody puts on a construction budget.
Who should hold the contingency?
The protection is the drawdown protocol rather than the location. Agree in writing before construction starts who may authorise spending against it, what qualifies, and how the balance is reported. Without that, contingency inside a contract price tends to get spent.
What should contingency not be used for?
Scope you decided you wanted after the fact, design the consultant should have completed, or escalation that could have been priced. Contingency spent is not contingency earned back.
If you are setting a budget and want a second view on whether the contingency is honest, that is a short conversation worth having. You can see how I work with owners and project partners on project solutions.
This article is general information about commercial construction practice in Canada, not legal or financial advice. Have your own advisors review your numbers.
Connect with Carolee on LinkedIn: linkedin.com/in/carolee-w-turner-2002417
Comments