What is a contingency fund?
A contingency fund is a set amount of money set aside for unexpected costs that may arise during a property development project. These costs can include factors outside of anyone's control, such as contractors being forced to close due to a pandemic. A contingency fund serves as a financial safety net to ensure that external variables do not cause a project to fail.
Overspend, on the other hand, refers to the deliberate choice to spend more than the original budget. This can be due to aesthetic or material choices, such as upgrading to more expensive bathroom or kitchen fittings. A contingency fund is an important aspect of property development, as it allows for unexpected issues to be addressed without compromising the overall project. The recommended amount to set aside for a contingency fund varies depending on the type of property, but for a newer building, 5% of the total project cost is suggested. In the case of a heritage restoration, a higher contingency fund may be necessary due to the potential for unknown issues to arise.
Having a contingency fund gives the client control and flexibility in addressing issues that may arise, allowing for informed and focused decision-making. In the long run, this strategy pays dividends as it ensures that the development is based on reasoned planning rather than quick fixes.