How much contingency does a construction lender require?
Most construction lenders require a contingency line of 5 to 10 percent of hard costs, and 10 percent is the standard for a first-time developer or a renovation with unknowns. The contingency sits inside the loan budget, is released only for approved overruns, and any unused portion reduces the loan at completion.
What the contingency is
A budget line held for costs that were not in the original scope: soil conditions, code changes, material price moves, and the items every project discovers after demolition. It is part of the loan, so it is funded by the lender and accrues interest only when drawn.
| Project type | Typical contingency required |
|---|---|
| New construction, experienced sponsor | 5 percent of hard costs |
| New construction, first project | 10 percent |
| Renovation of an existing building | 10 to 15 percent |
| Historic or occupied renovation | 15 to 20 percent |
Ranges vary by lender and project.
Who controls it
The lender. Contingency draws require a request explaining the overrun, usually with a change order, and the lender approves the reallocation. Some lenders release contingency freely for documented overruns; others hold it until other lines are exhausted. Ask which before you sign.
Hard cost vs soft cost contingency
Most contingencies are calculated on hard costs, meaning labor and materials. Soft costs, such as permits, design, and interest, usually carry their own cushion inside each line. Interest reserve shortfalls are a separate problem: the contingency generally cannot be used to pay interest.
When the contingency runs out
Overruns beyond the contingency are your cost. The lender will require you to deposit the shortfall before funding further draws, a condition called "loan in balance." Being out of balance stops draws until you cure it, which stalls the job. Keep reserves outside the loan for this reason.
Using the contingency well
- Do not treat it as an upgrade fund. Finish upgrades come from your pocket.
- Submit change orders before the work, with the contractor's revised price.
- Track the contingency balance on every draw request.
- Bid the project with a real scope so the contingency is for surprises, not for items left out of the budget.
At completion
Unused contingency is not paid to you. It simply reduces the amount drawn, so the loan balance is lower and the interest was never charged on it. That is the good outcome.
How CommFi handles it
Our lending desk reviews the budget with the contractor's numbers and the contingency before closing, so the loan starts in balance. It funds direct when it fits, and when a lender with a more flexible contingency policy is the better match, the desk searches a database of 7,000+ lenders and the ones that fit compete for the file. Zero upfront fees.
Related reading
Related questions
- How much contingency does a construction loan need?
- Five to ten percent of hard costs for new construction, ten for a first project, and ten to twenty for renovations.
- Is the contingency part of the loan?
- Yes. It is a budget line funded by the lender and drawn only for approved overruns, so it accrues interest only when used.
- Can I use the contingency for upgrades?
- No. It is for unplanned costs. Upgrades and scope changes are your expense unless the lender approves a reallocation.
- What does loan in balance mean?
- The remaining loan funds plus your deposits must cover the remaining cost to complete. If not, the lender stops draws until you deposit the shortfall.
- What happens to unused contingency at the end?
- It is never drawn, so the loan balance is smaller. It is not paid out to you.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.