· By Austin McKnight
Include a Contingency in Your Construction Loan to Avoid Budget Surprises
One-time close loans don’t allow changes mid-build. Here’s why including a contingency could save your project—and your budget.
- Construction
Protect Your Build Against Unexpected Costs
In today’s construction market, uncertainty is the new normal. Tariff concerns, material shortages, and labor cost spikes are all real factors that can impact the final cost of your new home. That’s why one of the smartest decisions you can make when building is to include a contingency in your construction loan.
Let’s break down what a contingency is, why it matters, and how to structure your loan to protect your budget—and your peace of mind.
What Is a Construction Loan Contingency?
A contingency is an additional buffer amount built into your construction loan to cover unexpected costs that might arise during the build.
Examples include:
- Price increases due to new tariffs or supply chain issues
- Weather delays or rework costs
- Upgrades you didn’t originally plan for
- Additional site prep or utility work
Think of it as a financial safety net. It’s not required, but it’s highly recommended—especially with a one-time close construction loan, where you only get one opportunity to set your total loan amount.
Why It’s So Important in Today’s Market
Right now, we’re seeing:
- Unpredictable shifts in material pricing (lumber, concrete, electrical components)
- New tariffs under discussion that could impact costs mid-build
- Labor shortages that may drive prices up between contract and completion
If you lock in your construction loan without a contingency and costs rise, your only options are to reduce the scope of the project or come out of pocket with cash. There’s no way to increase the loan once it’s closed.
How Much Should You Include?
At PRMI, we recommend one of two approaches:
Option 1: Include a Contingency
- 5–10% of the construction contract is typical
- These funds are only used if needed
- If unused, the remaining balance is applied to principal reduction on your loan
Option 2: No Contingency, But Have Reserves
- We recommend 6 to 12 months of liquid reserves
- Or access to cash equal to at least 10% of the construction contract
If you don’t have that level of liquidity available, the safer bet is to build the contingency into the loan from the beginning.
What Happens If the Contingency Isn’t Used?
If you complete your build without tapping into the contingency, great! The remaining balance isn’t wasted. Instead, it’s:
- Applied directly toward your principal, lowering your loan balance
- Reducing long-term interest and helping build equity faster
It’s a win-win: protection if you need it, savings if you don’t.
Final Thoughts
There’s no crystal ball in construction. Costs can change mid-project—even with a great builder, detailed specs, and a solid contract.
With a one-time close construction loan, you only have one chance to get the budget right. A contingency gives you the breathing room to handle surprises without derailing your project or draining your savings.
Not sure how much to include or how to structure it? Let’s talk. At PRMI, we’re here to help you build smarter from the ground up—with the flexibility and support to make sure your financing matches your vision.
