How much contingency should a construction project have?

There is no single right figure. The allowance depends on the type of building, how much of the design is finished, how the work is procured and how good the information is. A new build at fixed price and a refurbishment of an old structure can justify very different percentages. Lenders' surveyors commonly set their own requirement for the specific project, so a percentage quoted from a guide should be treated as a starting question rather than an answer.

What is the difference between a contingency and a provisional sum?

A provisional sum is an allowance in a contract for a known item of work that cannot yet be priced accurately, such as foundations awaiting a survey. A contingency is not tied to a particular item; it is held against costs that have not been identified. Actual cost replaces a provisional sum when the work is done, and any overspend against it usually falls first on the contingency.

Is contingency included in loan to cost?

Usually, yes. Most development budgets count the contingency as part of total project cost, so it is included in the ratio and available to draw if the surveyor approves. A lender may require a larger allowance than the developer budgeted, which raises total cost and can raise the equity required at the same loan-to-cost ratio. Practice varies, so the facility's definition of project cost is what settles it.

What happens to unused contingency at the end of a project?

It usually stays undrawn, so the loan stops short of its full limit and the developer's margin is that much higher. If the contingency has been funded with the developer's equity, the facility may hold it back until completion is certified and the cost-to-complete test no longer applies. A lender is unlikely to allow unspent contingency to be drawn and paid out to the developer before the loan is repaid, and facility terms set the exact position.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Construction Contingency: a Worked Example

The sum left matters less than the rate it is going.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

When a developer's budget carries a contingency, a lender asks what it is for, who may spend it, and how much is left compared with how far the work has come. It is the line that takes the first hit from the things that were not priced: a problem found behind a wall, a change the consent authority requires, a material that costs more than it did. When it has gone, the project has only the developer's new money or a stopped site. A lender's quantity surveyor therefore tracks it through the build as a measure of how well the budget is holding.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 08 — Basalt Ridge Developments. A new-to-bank developer, a claimed 28% ROE and two other banks circling. Your bank has a growth target. Your call first, then the senior banker's.

Read the file →

PART OF Property Development Finance

// 01 — WHAT IT IS THERE TO COVER

A budget lists what is known. A contingency allows for what is known to be likely but cannot be priced yet. It is a sum, usually a percentage of the building contract, inside the total project cost. The RICS standard on development valuation describes it as normal practice and says the amount depends on the nature of the development, how it is procured and how accurate the information behind the budget is.

Those three factors are why a percentage carried from another job tells a lender little. New build on a cleared site, with the design finished and a fixed-price contract signed, leaves fewer unknowns than the refurbishment of an old building with its services hidden behind plaster. A fixed-price contract moves many risks to the builder but not all of them: variations the developer asks for, conditions the contract excludes and the builder's own failure all come back to the project. On a cost-plus contract, the contingency is carrying nearly all of it.

It can also be carrying work it was not sized for. A price rise already expected, an unfinished piece of design and a programme likely to overrun may each have a line of their own, the last in the interest reserve. Where they do not, the contingency is the only money left to meet them, and it is smaller than it looks.

// 02 — HOW A LENDER CONTROLS IT

Cost to complete = unbuilt contract work

+ retentions still to be paid

+ interest and fees to the end

+ contingency the surveyor still requires

In balance when: undrawn loan + unspent equity ≥ cost to complete

The cost-to-complete test is why the contingency is part of the credit and not only part of the budget. It is a line of committed money that the lender has agreed to fund, but only for what the surveyor accepts. Agreements commonly say the contingency can be used only with the lender's consent or on the surveyor's recommendation, and that savings on other budget lines go into the contingency and do not get spent or taken out by the developer.

The contingency is usually inside total cost, and so inside loan to cost. A developer who enlarges it may add to the equity needed. One who shrinks it to reach a ratio has reduced the cost on paper and increased the risk in fact. Unspent contingency normally stays undrawn, which means a project that finishes well has a lower peak debt than the facility limit allowed.

// 03 — THE EXAMPLE

A developer is converting an old wool store into 18 loft apartments, constructed for this page like every figure in it. The building contract is US$10.0m, the contingency US$0.70m, or 7% of the contract. In month five of fourteen, the quantity surveyor certifies the work 36% complete. Asbestos found in the roof space and repairs to the old timber columns have taken US$0.42m, and US$0.28m remains. The developer's equity went in first and is spent, so only the undrawn loan is left to finish the job. The percentages are the example's and are not offered as a market norm.

Contingency used: 0.42 ÷ 0.70 = 60%

Work complete = 36%

If spending continued at that pace: 0.42 ÷ 36% = 1.17

Forecast against the allowance: 1.17 − 0.70 = 0.47 over

Cost to complete (US$m) With what's left As the surveyor requires

Unbuilt contract work (64%) 6.40 6.40

Retentions to be paid 0.18 0.18

Interest to the end 0.55 0.55

Fees to the end 0.10 0.10

Contingency 0.28 0.40

Total 7.51 7.63

Undrawn loan 7.51 7.51

Gap 0.00 0.12

Read on the face of the budget the project is in balance. Read with the surveyor's view of what is still to come, it is US$0.12m short, and that is what the developer is asked to find before the next drawdown. The straight-line forecast of US$0.47m over is deliberately crude, and likely too harsh here: a conversion finds most of its surprises during strip-out, so spending should slow. The surveyor's US$0.40m is a judgment that it will slow, though not stop.

A US$0.12m call is minor. Made in month five, it costs the developer little and tells the lender something about the project. Avoided in month five and forced in month twelve, with the money gone and the builder waiting to be paid, it can stop the site.

// 04 — WHAT STANDS BEHIND IT WHEN IT RUNS OUT

A contingency sits ahead of several other protections, and each is for something different. The developer's own margin is the next line of defence but exists only on paper until the sales arrive, so it cannot pay a builder this month. A cost overrun guarantee brings a guarantor's promise in behind the contingency, and is worth what the guarantor can pay. The builder's own allowance, priced inside its tender, is not the developer's money to spend and can disappear with a builder in difficulty.

DEFINED IN ONE PARAGRAPH → · COST TO COMPLETE → · COST OVERRUN GUARANTEE →

// 05 — WHERE IT DECIDES A FILE

Before approval, it is one of the numbers that shows whether a developer has budgeted from experience. The file on Issue 08 carries a contingency a lender would be right to question, and Drawing a Development Loan shows how the same line behaves over a build. An increase agreed at this stage usually means more equity, and it is much easier to ask for now than after the first drawdown.

During the build, the monthly report answers three questions: how much has been used, on what, and how does that compare with progress. A contingency being spent on unforeseen ground or hidden structure is doing its job. One being spent on upgraded finishes the developer chose is an overrun with a different label, and a lender asks for variations of that kind to come out of the margin. The conversation is worth having at the first sign and in writing.

THE BUILD, MONTH BY MONTH → · DEVELOPMENT LOAN, THE PRODUCT →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

RICS, Valuation of development property, professional standard, global, 1st edition (October 2019, reissued as a professional standard April 2023) — appendix B1.2.5 — States that a contingency allowance is normal, usually as a percentage of the building contract sum, with the quantum depending on the nature of the development, the procurement method and the accuracy of the information — section 01.

// QUESTIONS PEOPLE ASK

How much contingency should a construction project have?: There is no single right figure. The allowance depends on the type of building, how much of the design is finished, how the work is procured and how good the information is. A new build at fixed price and a refurbishment of an old structure can justify very different percentages. Lenders' surveyors commonly set their own requirement for the specific project, so a percentage quoted from a guide should be treated as a starting question rather than an answer.
What is the difference between a contingency and a provisional sum?: A provisional sum is an allowance in a contract for a known item of work that cannot yet be priced accurately, such as foundations awaiting a survey. A contingency is not tied to a particular item; it is held against costs that have not been identified. Actual cost replaces a provisional sum when the work is done, and any overspend against it usually falls first on the contingency.
Is contingency included in loan to cost?: Usually, yes. Most development budgets count the contingency as part of total project cost, so it is included in the ratio and available to draw if the surveyor approves. A lender may require a larger allowance than the developer budgeted, which raises total cost and can raise the equity required at the same loan-to-cost ratio. Practice varies, so the facility's definition of project cost is what settles it.
What happens to unused contingency at the end of a project?: It usually stays undrawn, so the loan stops short of its full limit and the developer's margin is that much higher. If the contingency has been funded with the developer's equity, the facility may hold it back until completion is certified and the cost-to-complete test no longer applies. A lender is unlikely to allow unspent contingency to be drawn and paid out to the developer before the loan is repaid, and facility terms set the exact position.

// NEXT TO IT

// ON WHOSE DESK

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THE READING ROOMIN ONE PARAGRAPHContingency (construction budget) What is a construction contingency, and what happens when it runs out?