Construction: manage unexpected costs with contingency

What is contingency and why is it so important?

Contingency is an amount you set aside in your budget that you can turn to if the unexpected occurs. It’s a financial cushion that absorbs hard blows, no matter at what stage of the project they occur.

In the current context, it’s more essential than ever. The construction industry is being subjected to a combination of factors that increase the risk of cost overruns:

• Persistent inflation, which causes material prices to fluctuate overnight
• Delays in the supply chain, which can halt a project for days or weeks
• A chronic shortage of skilled labour, which lengthens deadlines and increases costs

Without contingency planning, it is contractors like you who foot the bill. These unforeseen events eat into your margins, undermine your financial health, and often erode the client's confidence. Planning for contingencies shows that you’re managing your project with caution and professionalism, while ensuring its financial stability.

What costs can a contingency cover?

A well-planned contingency allows you to stay afloat when unexpected expenses arise. It can be used to cover:

• Costs related to delays caused by labour shortages or supply delays: overtime, accommodation and transportation for workers on remote sites, etc. 
• Equipment rentals, sometimes at high prices, to replace defective equipment or speed up work to make up for delays
• Sudden increases in the price of materials, which are unpredictable in today's market
• Purchases of materials and unexpected repairs needed to correct a defect or error during construction

An investment in your company's reputation

Contingency is not just a budget item: it’s a guarantee of quality and credibility. It helps you deliver a project that meets standards, even when things don't go as planned.

Without this margin, some contractors are forced to cut back on materials, reduce quality control steps or postpone repairs to limit losses. A substandard project leads to claims, disputes and a tarnished reputation.

On the other hand, a well-calculated contingency:

• Allows you to maintain your construction standards and comply with regulatory requirements
• Demonstrates forward-thinking and professional management
• Strengthens the confidence of clients and financial partners
• Protects the financial stability, reputation, and credibility of your company

Guidelines for calculating contingencies

Including a contingency in a bid is an excellent practice. But for it to fully serve as a safety net, it needs to be estimated correctly.

In general, recognized practices recommend a range of:

• 5 to 7% for standard projects with few known risks
• 10 to 15% for more complex projects, renovations or those with a high degree of uncertainty

To adjust this margin to the reality of your project, there are a few best practices to follow:

• Analyze the risks specific to the project: location of the site, dependence on certain suppliers, technical complexity, regulatory constraints, seasonality, etc.
• Draw on past experience, based on cost overruns observed in similar projects
• Distinguish between contingencies for design and construction, especially when plans or estimates are still being developed

Mistakes to avoid:

• Underestimating contingencies to make the bid more competitive: an overly tight budget can become a time bomb.
• Not planning for anything at all, exposing your profit to major risks, especially in times of inflation and labour shortages.
• Not justifying contingencies to clients: an explained and documented amount is a sign of thoroughness and strengthens your credibility.

Got a project coming up? Call on one of our security bond experts

Planning for contingencies doesn’t mean inflating a bid. It means preparing for surprises, protecting your margins, and maintaining a solid relationship with the client.

Want to protect your projects from the unexpected? L’Unique’s security bond experts can help you structure your bids in an optimal and secure manner. Contact us to learn more.