Glossary

Construction Contingency

Also known as: Owner's Contingency, Hard Cost Contingency

Construction contingency is a budget line reserved within a development's overall cost budget—typically 3% to 10% of construction cost—to absorb unforeseen conditions, design errors, change orders, and cost escalation without requiring additional capital contributions.

It is important to distinguish the owner's contingency, held outside the construction contract and drawable only with the owner's (and often the lender's) approval, from the contractor's contingency embedded within a GMP, which belongs to the contractor and is never visible or accessible to the owner. Lenders typically impose a minimum contingency requirement as a loan condition and monitor the remaining contingency balance throughout the draw period as an early warning indicator: a contingency burning down faster than the percentage of construction complete signals a project trending toward a budget shortfall well before it becomes unmanageable. Contingency draws are generally approved change order by change order rather than released in bulk, preserving the reserve's function as a controlled buffer rather than a source of discretionary spending.