What Is A Contigency?
A contingency is funds set aside to cover unexpected costs that may occur during your home building project. This money is not earmarked for any specific scope of work but is reserved for unforeseen costs that may arise.
Contingency For Cash Buyers
If you are paying cash for your project, balance is required in determining the amount of contingency you should set aside. You will want to have enough contingency on reserve to cover any unforeseen costs, but you also need enough cash on hand to keep the construction process moving forward. For most projects, your contingency should represent approximately 5-10% of the total estimated cost of the project.
Contingency For Construction Loans
If you are using a construction loan for your project, the bank will typically add the same 5-10% contingency amount for unforeseen costs. A contingency can be thought of as a line of credit that is nice to have in the event you need it. With that said, it makes sense to qualify with the bank for the highest possible amount; if you end up not using it, then it costs you nothing.
Why You Need A Contingency
Unforeseen conditions and related cost overruns are common in the construction industry. At Suprema Homes, we have developed a process that minimizes unforeseen costs for the actual building of the home. We have done this by not offering ‘guestimate’ costs, or cost ‘ranges’ during the home selection process. That said, recent events such as the pandemic, natural disasters, wars, etc., have reminded us that material, labor, and shipping costs can fluctuate significantly. In addition, unforeseen conditions and requirements related to the development of your land can present themselves during the construction process. Even a change in the sales tax rate at your location can increase the cost of future draws. Give careful consideration to your contingency funds. If you end up needing it, you’ll be happy you have it!