How Much Contingency Should You Budget When Building or Renovating?
If you’re planning to build a new home or renovate your current one, you’ve probably spent a lot of time thinking about costs. Land, design, permits, materials, it all adds up quickly. But there’s one part of the budget that many people don’t fully understand. It’s called a contingency. And while it might not be the most exciting part of your project, it’s one of the most important.
So, what is a contingency?
A contingency is money you set aside in your building budget for unexpected costs. Think of it like an emergency fund, but just for your building project. It’s not there because you expect something to go wrong. It’s there because building involves a lot of unknowns. Even with the best planning, some things only show up once construction starts. For example, imagine building on a new block. Everything looks fine on the surface, but when excavation begins, the builder hits rock underground. Removing that rock takes extra time and machinery, which means extra cost. That’s where a contingency helps. Instead of panic or delays, the project keeps moving.
What a contingency is NOT
This is where people often get confused. A contingency is not bonus money for upgrades. It’s not a shopping fund for nicer tiles or a bigger deck. And it’s not there to fix poor planning. It’s also not spare cash for landscaping or furniture. A true contingency is only for things that couldn’t reasonably be known at the start. In other words, it’s there for surprises, not shopping.
Real examples of when contingencies are used
Let’s look at a few situations we see regularly. In renovations, hidden issues are very common. A family might plan to open up a wall, only to discover old wiring that isn’t up to code. That wiring now needs to be replaced before work can continue. Or maybe someone is extending an older home and discovers that part of the existing structure isn’t strong enough to support the new addition. Extra engineering is needed, which means extra cost.
Even new homes can have surprises. Poor soil conditions, unexpected drainage issues, or tricky site access can all impact the final price. None of these situations are unusual. They’re simply part of working with land and buildings.
Why banks and lending matter
Here’s something many people don’t realise until it’s too late: contingencies aren’t just about building, they’re about finance too. When you apply for a construction loan, the bank assesses how much they’re willing to lend you upfront. If your contingency is included in that borrowing amount, the money is already there if you need it.
That makes life much easier. But if you don’t allow a contingency and an unexpected cost pops up, things can get stressful. You may need to go back to the bank and ask for more money. And that’s not always simple. Your financial situation might have changed. Lending rules might be stricter. Interest rates might be higher. In some cases, people can’t access extra funds at all, even mid-build. Planning your contingency early helps avoid that risk entirely.
Why renovations need bigger contingencies
Not all projects carry the same level of risk. New homes usually have fewer surprises because you’re starting from scratch. With good soil testing and engineering, many unknowns can be reduced. Renovations and extensions are different. You’re working with an existing building, and you can’t always see what’s inside walls, floors, or ceilings until work begins. It’s a bit like renovating an old car. You might think you’re just replacing the paint, but once you start, you realise parts underneath need attention too. That’s why renovation contingencies are usually higher than new builds.
What happens if you don’t have a contingency?
This is where things can get tough. Without a contingency, even a small surprise can create big pressure. We’ve seen projects where homeowners had to pause construction while trying to organise more funds. Others had to make rushed decisions or cut back on parts of their design just to keep things moving.
In more serious cases, projects can stall completely until finances are sorted. And unfortunately, delays in construction often come with extra costs. Trades need to be rescheduled. Materials can go up in price. Holding costs add up. A small buffer early can prevent a lot of stress later.
So, how much should you allow?
Every project is different, but a general guide is:
- Around 5–10% for new homes
- Around 15–20% for renovations or extensions
The right number depends on your site, your design, and how comfortable you are with risk. A simple, flat block may need less contingency. A complex renovation may need more.
The real purpose of a contingency
At the end of the day, a contingency isn’t just about money. It’s about confidence. It allows you to move through your project knowing that if something unexpected happens, you’re prepared. You won’t need to panic, rush decisions, or compromise your vision. Instead, you can focus on what really matters, creating a home that works for your lifestyle. And that peace of mind is often worth far more than the contingency itself.
If you’re planning a build or renovation and want to better understand costs, risks, and what to expect, getting clear advice early can make the entire journey smoother. The more prepared you are from the start, the more enjoyable the process will be.
If you would like more information on project contingencies, listen to our podcast, The Building Design, Prime Time Podcast (E118. How much contingency should you allocate for new homes and renovations/extensions?) or contact us so we can discuss your project with you for more specific advice about getting started.