Construction Contingency: Typical Fees, Uses & Best Practices

Most project managers know about construction contingency, but do you really understand how it works and what it should cover? Setting the right amount and using it wisely can mean the difference between a smooth project and a financial disaster.

In this guide, we’ll break down how much contingency you need, how it’s used, and the biggest mistakes to avoid so you can stay in control of your budget and keep your project on track.

What is Construction Contingency?

A construction contingency is money set aside in a project budget to cover unexpected costs during construction. It helps manage risks like design changes, material price increases, or unforeseen site issues. This ensures the project stays on track without financial setbacks.

Construction contingency typically cover costs related to unforeseen site conditions, material price increases, design modifications, and weather delays:

• Unforeseen Site Conditions: Hidden utilities, poor soil, or unknown structural issues.
• Material Price Increases: Sudden cost changes due to market conditions.
• Design Modifications: Necessary changes or errors in plans that require adjustments.
• Weather Delays: Extended labor or rescheduling costs due to bad weather.

For example, if a contractor discovers unstable soil while preparing the foundation, additional excavation and reinforcement may be needed. The extra cost comes from the contingency fund, allowing the project to continue without financial strain. That is a construction contingency—funds reserved for handling unexpected expenses in a project.

Why is Construction Contingency Important?

Construction projects often face unexpected challenges that can impact costs. A contingency in construction prevents cost overruns, project delays, or financial losses when issues arise. It gives owners and contractors the flexibility to handle problems without affecting the project's progress.

Key reasons construction contingency is essential include:

• Prevents Financial Risks: Covers extra costs without exceeding the budget.
• Reduces Project Delays: Ensures work continues despite unforeseen issues.
• Improves Risk Management: Helps plan for common construction uncertainties.
• Increases Cost Control: Keeps spending under control while adapting to changes.

If you want to manage budgets effectively, read our Project Cost Management guide for strategies to control costs and avoid financial risks.

How Much Contingency Should a Construction Project Have?

A construction project usually needs 5% to 10% of the total cost as a contingency, but the exact amount depends on project complexity and risks. High-risk projects may require a 10% to 20% contingency fee, while low-risk ones might need less than 5%.

To calculate the contingency amount:

• Multiply the total construction cost by the contingency percentage (e.g., $1M × 10% = $100K).
• Evaluate project risks, such as design uncertainty, site conditions, or material price changes.
• Consider the contract type, as cost-plus contracts often need higher contingencies than fixed-price contracts.

Try this construction cost calculator to get accurate project cost estimates and plan your contingency budget with confidence.

How Contingency Fees Work in Contractor Agreements

Contractors include a contingency fee as part of their pricing to manage risks within their scope of work. This fee helps cover:

• Unforeseen site conditions: Hidden underground utilities or unstable soil.
• Material price fluctuations: Sudden increases in essential materials.
• Minor design adjustments: Small changes needed to align with project requirements.

In most contracts, construction contingency fees must be justified before use. Contractors may need owner approval to access these funds, depending on contract terms.

Percentage-Based vs. Fixed Contingency Fees

• Percentage-Based Fees: Calculated as a percentage of total project costs (e.g., 10% of a $5M project = $500K contingency). Used in cost-plus and large-scale projects.
• Fixed Contingency Fees: A set dollar amount, regardless of project cost. Used in smaller or fixed-price contracts where budgets are tighter.

Typical Contractor Contingency Fees

• Low-Risk Projects: 5% or less (straightforward builds with clear scopes).
• Medium-Risk Projects: 5% to 10% (standard commercial or residential projects).
• High-Risk Projects: 10% to 20% (infrastructure, high-uncertainty, or complex builds).

Setting the right contingency fee in construction protects contractors from unexpected costs while maintaining a competitive bid. Owners and contractors should clearly define when and how contingency fees can be used to prevent disputes.

Types of Construction Contingency Funds

Construction contingency funds are divided into different types based on who controls them and how they are used. The main categories include owner contingency, contractor contingency, and design contingency, each serving a different purpose.

Owner Contingency

An owner contingency is controlled by the project owner to cover extra costs beyond the original contract. It helps manage scope changes, required modifications, or market-driven cost increases.

This fund is used for:

• Owner-requested changes: Adding features or modifying the project.
• Regulatory compliance: Meeting updated building codes.
• Material or labor price increases: Adjusting for unexpected cost changes.

Contractor Contingency

A contractor contingency is set aside by the contractor for costs within their scope of work. It covers unforeseen conditions, price fluctuations, or subcontractor adjustments without requiring owner approval.

It may be used for:

• Hidden site conditions: Unknown underground utilities or unstable soil.
• Material price changes: Unexpected cost increases during construction.
• Labor and subcontractor costs: Unplanned adjustments to schedules or contracts.

Design Contingency

A design contingency is used for design-related changes during construction. It covers errors, missing details, or necessary modifications to project plans.

Common uses include:

• Plan adjustments: Fixing errors or refining designs.
• Code updates: Meeting new building requirements.
• Coordination issues: Aligning different parts of the project.

Allocating construction contingency correctly helps keep projects on track. Owners, contractors, and design teams should agree on how these funds will be used before construction begins.

How is Construction Contingency Used?

Construction contingency requires proper approvals, clear spending guidelines, and ongoing tracking to ensure they are used correctly. Below is how a contingency budget in construction is approved, spent, and monitored.

Approval Process: Who Approves the Use of Contingency Funds?

Contingency funds cannot be used freely. They require approval based on contract terms. The approval process typically includes:

1. The contractor or project manager identifies an unexpected cost.
2. A formal request is submitted to the owner, financial team, or contract administrator.
3. Stakeholders review the request to confirm the expense qualifies under contingency rules.
4. Once approved, funds are released, and records are updated for cost tracking.

Approval steps vary by contract type. Some projects require strict oversight, while others allow contractors more flexibility.

Eligible vs. Ineligible Costs: What Can Contingency Cover?

Contingency in construction must be used for true unexpected costs, not for regular project expenses.

Construction Contingency vs. Allowance

Construction contingency covers unforeseen risks, whereas allowance accounts for specific materials or work with uncertain costs. The table below highlights the key differences between them.

As you can see, contingency is for surprises, while allowance is for planned construction expenses. Contingency provides flexibility for unforeseen issues, while allowance ensures that certain project elements are accounted for, even if their exact costs are not known at the start.

Best Practices for Managing Construction Contingency

Managing construction contingency effectively requires careful planning, clear guidelines, and regular tracking. A structured approach ensures funds are used correctly while keeping the project on budget.

Here are the best practices for construction contingency management:

• Set a Realistic Contingency Amount: Determine the right percentage based on project size, complexity, and risk level to avoid underfunding or excessive reserves.
• Define Clear Usage Guidelines: Establish what contingency funds can and cannot be used for to prevent unnecessary spending.
• Monitor Contingency Spending Regularly: Track every expense to ensure budgets are used efficiently and transparently.
• Require Proper Approval Processes: Implement an approval system where stakeholders review and authorize contingency use before releasing funds.
• Adjust Contingency as the Project Progresses: Reevaluate risk levels at different project stages to reallocate funds as needed.

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Common Mistakes in Construction Contingency Planning

Poor contingency planning leads to budget shortfalls, disputes, or inflated costs. Many projects run into financial trouble because they underestimate, misuse, or fail to control contingency funds properly.

• Underestimating Contingency Needs: Setting aside too little contingency leaves projects vulnerable to unexpected costs, leading to budget overruns and delays.
• Not Defining Contingency Rules in Contracts: Without clear guidelines, contractors and owners may disagree on how funds are used, causing disputes and delays.
• Overusing Contingency Funds: Using contingency for minor adjustments or non-critical expenses can inflate costs unnecessarily and reduce available funds for real emergencies.

For example, a contractor might assume a 5% contingency is enough for a complex project, only to face unforeseen site conditions and material price hikes that exceed the budget. Without proper contingency planning, the project stalls, requiring additional funding and approval delays.

Stay in Control of Your Construction Budget

Unexpected costs are a part of every construction project, but a well-managed contingency fund keeps them from becoming costly setbacks.

Setting the right amount, following clear rules, and tracking every expense helps you stay on budget and avoid financial surprises.

So take the guesswork out of contingency planning with Mastt. Track funds in real time, speed up approvals, and keep your project moving—all in one easy-to-use platform.