A contingency is a dollar reserve set aside in the construction budget to cover unforeseen conditions or cost overruns discovered during construction. For residential projects, the typical contingency is 3-7% of hard costs, though this varies by project type, location, and risk profile. New construction with good soils and clear site conditions may use 3%, while renovation or complex sites may use 7-10%.
Contingency is distinct from change orders. Contingency is drawn when hidden conditions are discovered (rotten framing, buried utilities, poor soils requiring special foundation work). Change orders are for owner-requested scope changes. When the owner requests additional finishes or upgrades, this should come from a separate allowance or as a change order, not from contingency.
The most common discipline failure in residential construction is drawing on contingency for scope changes instead of issuing change orders. This obscures true project cost and erodes the safety margin. A disciplined project tracks contingency separately, requires documentation before drawing, and preserves it for genuine unforeseen conditions. If contingency is fully consumed before substantial completion, the project is underwater.