A contingency is an addition to the cost breakdown, usually based on a percentage of the hard costs, to be used to fund changes during the build. For example, the borrower decides half way through the build that rather than granite tile, they want granite slab in the kitchen. They can either pay that out of pocket, or if they have a contingency reserve, that will fund the difference. The money for changes cannot be shifted from one line item to another. Historically, some banks have required a contingency reserve. Currently, a contingency reserve is allowed, but generally not required on all of our construction loan programs. Even when a contingency is desired, sometimes there is not room in the deal based on loan-to-cost calculations or the loan amounts for which the borrower can qualify. Program # 4 allows for a cost plus contract (as opposed to fixed price), and in this case does require a contingency. A contingency reserve may also be required if the borrower will be their own general contractor. This is possible if one of the borrowers is a GC, they make their living from job income (not capital gains on real estate), and it is clear from the circumstances that they are building their own house and not trying to get cheap spec money. Contingencies are usually 5 or 10% of the hard construction costs if used.
