Cost Contingency

Cost contingency in the context of a construction or real estate development project refers to an amount of money set aside to cover unforeseen expenses that may arise during the course of the project. These unexpected costs could result from various factors such as changes in the project design, material price increases, labor cost changes, or unanticipated site conditions.

Contingency is an essential part of budgeting for a construction project as it provides a financial cushion to handle risk and uncertainty. It is typically expressed as a percentage of the estimated project cost, with the percentage used varying based on the perceived risk level of the project. For example, a project with many unknowns might have a higher contingency, often between 10% to 20% of the total project cost, while a project with fewer risks might have a lower contingency.

It's important to note that the contingency fund is not intended to cover changes in the project scope. If the project's scope changes significantly, these costs would typically be handled separately from the contingency fund.

Cost contingency is a critical risk management tool in construction and real estate development. Any funds remaining in the contingency budget at the end of the project can be returned to the owner or reallocated as profit, depending on the specifics of the project contract.