Construction Contingency: How to Size and Use Your Budget Cushion

A construction contingency is a line in your budget set aside for costs nobody planned for. It is not profit and it is not an upgrade fund. It exists so that a surprise, like rock in the foundation trench or a jump in lumber prices, does not stop the project or force you to scramble for cash mid-build.

How much to carry

A common rule of thumb is roughly 5% to 10% of hard costs. Go toward the higher end when:

• The lot has unknowns, like slopes, fill, poor soil or long utility runs.
• The design is custom or unfamiliar to your builder.
• Bids are allowances or estimates instead of firm prices.
• The project type is new to you or your builder.

Go toward the lower end when the plan is standard, the builder has built it before and the bids are firm. Lenders review contingency as part of the budget, and some require a minimum.

How it gets used

Contingency is typically held inside the loan's construction holdback and released through the normal draw process. When an unplanned cost shows up, you document it, often with a change order or invoice, and request that it be paid from contingency. The lender reviews it before releasing funds. Using a big chunk early is a warning sign to you and the lender that the budget may be off.

Contingency vs. interest reserve vs. your own reserves

These are three different cushions:

• Contingency: covers unexpected construction costs.
• Interest reserve: money set aside, often within the loan, to make interest payments during the build. Not every lender offers one. RSC Private Lending can build a full interest reserve into New Construction loans.
• Personal reserves: cash you hold outside the deal for anything the first two do not cover. RSC does not require cash reserves on New Construction, but they are still your last line of defense.

A strong project often has all three.

Example (illustrative numbers only): A $350,000 hard-cost budget includes a 7% contingency of $24,500. During excavation, the crew hits groundwater and needs $11,000 for drainage. The investor documents the cost, the lender approves it from contingency, and $13,500 is left for the rest of the build. When finish prices rise $6,000, it is covered too.

What this means for you

Size contingency to the real risk of your project, not to make the budget look smaller. Track it every draw. If it is shrinking faster than the build is progressing, review the budget with your builder and lender right away. Unused contingency at the end is simply money you did not have to spend.

Working through a construction budget? Send RSC Private Lending your scenario for a term sheet in 24 hours. All loans are business-purpose and subject to underwriting.