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Financialaka: contingency reserveaka: project contingencyaka: owner's contingency

Contingency

In Plain English

A budget reserve set aside to cover unexpected costs or scope changes during a project.

Definition

Contingency is a budgetary reserve added to a project cost estimate to cover unforeseen conditions, design evolution, and cost uncertainties. Owner's contingency covers scope growth and design changes; contractor's contingency covers field uncertainties and risk. Contingency is typically 5–15% of construction cost, decreasing as design completeness increases. Drawing down contingency faster than expected is a red flag for project financial performance.

Why It Matters in Bidding

Contingency is central to how owners and contractors price risk in a bid. A contractor who builds too little contingency into a hard-bid price exposes itself to losses when field conditions differ from the drawings, while too much makes the bid uncompetitive. On the owner side, the contingency line in the project budget determines how much room exists to absorb change orders before requesting additional funding.

Example

The owner held a 10% contingency on the $15M project and approved the release of $450,000 from contingency to cover unforeseen soil conditions discovered during grading.

Related Terms

Change OrderCost OverrunValue EngineeringCost to Complete

Frequently Asked Questions

Contingency commonly ranges from about 5 to 15 percent of construction cost and shrinks as design completeness rises. A conceptual estimate at schematic design carries more contingency than a fully detailed bid set, because fewer unknowns remain. The right percentage depends on design maturity, project complexity, and the level of unknown site conditions.
Owner's contingency covers scope growth, design changes, and decisions the owner makes during construction. Contractor's contingency covers field uncertainties, productivity risk, and minor coordination gaps within the agreed scope. They are budgeted separately and controlled by different parties, so confusing the two leads to disputes over who funds a given change.
Contingency is the funding source many owners draw on to pay approved change orders without increasing the overall budget. When change orders consume contingency faster than the project timeline suggests they should, it signals scope or design problems early. Tracking contingency drawdown against percent complete is a standard project financial health check.

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