A contingency is not money waiting to be spent. It is money held back because an existing building rarely reveals everything before work begins.
That difference is easy to understand at the start and surprisingly easy to forget. The project is moving, the contingency is untouched and a more expensive stone or piece of joinery suddenly looks affordable. A few weeks later, the drains are found running beneath the new kitchen or a ceiling comes down and exposes damaged timber.
The problem is not that the better stone was an unreasonable choice. It is that two different kinds of spending were treated as though they were the same.
Keep three parts of the budget separate
Contingency is for the unknown. It covers things discovered when the building is opened up, such as hidden damage, unexpected drainage or structure that differs from the information available at design stage.
A provisional sum is different. It is an allowance for work that is known to be needed but cannot yet be priced accurately. There may be drainage alterations, for example, but the exact route or extent is still unclear. The allowance sits within the project price until the work can be defined.
Then there is the change budget. This is for decisions made during the project. You might choose a different fitting, add sockets, enlarge a piece of joinery or upgrade a finish. Changes are normal and often worthwhile. They simply need their own allowance.
When all three sit in one pot, the visible and enjoyable choices tend to consume the money intended for less visible risk. Keeping them separate makes it much easier to see whether the project is absorbing an unknown condition or whether the scope is growing through choice.
How much contingency is enough?
There is no percentage that suits every renovation. A figure offered without looking at the property, the surveys and the design information is only a guess.
As an early guide, a well-understood project may carry an allowance around ten per cent. Older, altered or poorly investigated buildings may need fifteen or twenty per cent, sometimes more. Period and listed buildings, cellars, limited access and incomplete surveys all increase uncertainty.
The appropriate figure should come from the risks in the actual project. How much of the building has been surveyed? How developed is the design? What information will the builder price? Is the work being tendered as a defined package or carried out on a cost-plus basis? Who carries each risk under the contract?
A large new extension on open ground can be more predictable than a much smaller internal refurbishment in a Victorian house that has been altered repeatedly. The key issue is not the physical size of the work. It is how much remains hidden or uncertain.
Historic square-metre rates need similar care. Construction prices moved sharply in the early 2020s, and an old figure should not be applied without updating it for current prices, location, specification, scope and site conditions. It may still be useful as a reference, but it is not a current budget until those adjustments have been made.
What the contingency should cover
Legitimate contingency items are usually discovered rather than selected.
A wall may not be built as the old drawing suggests. Drainage may be in the wrong place or in poor condition. Damp may turn out to be caused by a failed detail rather than the simple repair first assumed. Wiring may need more extensive replacement. Timber decay may sit behind an apparently sound finish. Foundations may be shallower than expected. Previous work may have been carried out badly or without the approvals now needed.
Asbestos is a particular risk in buildings constructed or refurbished before 2000. A suitable survey before work starts can reduce the chance of an expensive and disruptive discovery, although it may not identify every concealed material without opening up the building.
The contingency should not pay for a conscious change of mind. An upgraded appliance, a new room added to the scope or a more expensive finish belongs in the change budget. If that budget has been used, the choice is either to find a saving elsewhere or accept that the project now costs more.
That distinction may feel strict, but it protects the project from reaching the point where an essential repair has to compete with a discretionary purchase already made.
Build the whole project budget, not only the building cost
Many early budgets begin and end with an estimated builder’s price. The actual amount needed is usually wider.
Professional fees need to be included, along with planning, building control and certificate charges. Surveys may include measured, structural, drainage, asbestos, tree and topographical work. Party wall surveyors may be required, including in some circumstances the adjoining owner’s reasonable costs.
There may be insurance, temporary accommodation, storage and removals. Furniture, window treatments and equipment are often left until the end even though they are necessary to make the house usable. External making good and landscaping also disappear from early budgets, particularly where the main work has damaged gardens, paths or boundaries.
Finance costs matter too if the project is being funded through borrowing.
Then there is VAT.
Ask the VAT question before signing the contract
This is general information, not tax advice. Residential VAT is detailed, and the correct rate depends on the property, the work, the supplier and the evidence available. A specialist should confirm the position before you rely on a relief.
Most extensions, internal alterations, repairs and renovations to an occupied existing home are charged at the standard rate of twenty per cent. Professional services are also normally standard-rated where the consultant is VAT registered, even if some of the building work attracts a different rate.
This can create a large difference between a figure discussed without VAT and the amount eventually paid. On £100,000 of building work and £15,000 of professional fees, twenty per cent VAT adds £23,000.
A standard loft conversion to a house you already occupy is not zero-rated simply because it creates additional accommodation.
There are genuine reliefs. Qualifying renovation work to a home that has been empty for at least two years may be charged at a reduced rate of five per cent. A separate route may apply where the property was empty for two years before acquisition, no substantial renovation took place during that period, the work is supplied to the future occupier and it is carried out within one year of purchase. Relief may also apply where the number of dwellings changes or a non-residential building is converted into a home.
Not every part of a qualifying project receives the reduced rate. Professional services, some fitted goods, scaffolding hire and landscaping can remain standard-rated. A single project may therefore contain more than one VAT rate.
Evidence is important. Council tax records or confirmation from the local authority’s empty property officer may be needed to demonstrate the vacancy period. The contractor applies the correct rate on the invoice. It is not normally a simple refund that the homeowner claims later.
If you are buying a property that has stood empty, raise the issue with a VAT specialist before the building contract is signed. On a substantial refurbishment, the difference between five and twenty per cent can materially change whether the project is viable.
Think about timing as well as the total
A budget tells you what the project may cost. Cash flow tells you when the money is needed.
Building work is commonly paid through monthly valuations or agreed stages, depending on the contract. The amounts are rarely even. Payments become heavier as structure, services and finishes overlap, while deposits for long-lead items may be due well before those items arrive on site.
A retention may be held back until defects are corrected after completion. At the same time, furniture, storage and temporary accommodation can continue drawing on the wider budget.
For a property purchase, design and preparation may also be paid for before completion. That early spend can save months after the keys arrive, but it needs to be allowed for. A client who expects all project costs to begin on completion day can find the pre-construction phase financially uncomfortable even when the total budget is adequate.
The most useful budget is not the maximum amount you might be able to borrow. It is the amount you can spend without the project taking over your finances and your life.
Set that number, define what it includes and share it honestly with the design team. A designer working with the real budget can make informed choices. A designer working with an optimistic figure will eventually produce a scheme you have to reduce or abandon.