Design Considerations / Cost & Budget / Through the design
Contingency and allowances
Even a well-documented house carries some money that isn't fixed. There's the contingency you hold back for the unknown, and there are the allowances inside the builder's price for things not yet chosen or not yet known. Understanding both, and keeping them as small and as honest as possible, is what stops a fixed price from creeping up.
Design ConsiderationsCost & BudgetAt a glance
Hold a contingency of your own, separate from the builder's price, and protect it. Make as many selections as you can before signing, so the allowances in the price are few and realistic. Release the contingency as the risks pass.
- A contingency is your money, held back for the unknown. It isn't part of the builder's price.
- Allow about 5% to 10% of the construction cost for a new house, and 10% to 20% for a renovation.
- A prime cost item is an allowance for something not yet chosen, such as tapware or tiles. Choose dearer, and you pay the difference.
- A provisional sum is an allowance for work whose extent isn't known, such as rock excavation. It's adjusted to the actual cost.
- Low allowances make a price look cheaper than it is. Compare them line by line between quotes.
- Thorough documentation and an early builder reduce the unknowns, so less needs to be held back.
ContingencyYour money for the unknown
A contingency is a sum you hold back from your total budget for things nobody can foresee. It isn't part of the builder's price, and it isn't a fund for upgrades. It's there for what turns up:
- ground conditions that are worse than the soil report suggested
- hidden problems in an existing house, such as rot, old wiring or undocumented changes
- an allowance in the contract that comes in higher than estimated
- a change you decide is genuinely necessary once the house takes shape
How much. For a new house on a straightforward site, hold back about 5% to 10% of the construction cost. For a renovation, hold back 10% to 20%, because nobody knows what's behind the walls, under the floor or in the roof until they're opened.
Keep it separate. Treat the contingency as spent until it's released. If it's folded into the budget for the house, it gets used for upgrades during design, and then there's nothing left when something real turns up.
Release it as the risks pass. Most of the risk is in the ground and in the existing building. Once demolition and excavation are done and the footings are in, much of it has passed. By the time the frame is up and the house is closed in, most of the rest has too. What's left at the end can go to the landscaping, the window coverings or the things you deferred.
AllowancesThe money inside the builder's price
A fixed-price contract is only as fixed as its allowances. There are two kinds.
| Prime cost item | Provisional sum | |
|---|---|---|
| What it's for | An item not yet chosen | Work whose extent isn't yet known |
| Examples | Tapware, tiles, appliances, light fittings, door hardware | Rock excavation, extra piering, landscaping, driveway |
| What it covers | Usually the supply of the item only | The work, including labour and materials |
| How it changes | If the item you choose costs more, you pay the difference | It's adjusted to the actual cost of the work |
When an allowance is exceeded, most contracts add the builder's margin to the difference as well. The contract will say how it's calculated. Read that clause before you sign.
The cheap quote
Two quotes for the same house can differ widely, and the cheaper one isn't always cheaper. One of the easiest ways to make a price look low is to set low allowances: a small sum for the kitchen, a modest figure for the tiles, a token amount for rock. The real cost arrives later, as the allowances are used up and exceeded. When comparing prices, line up the allowances side by side. A quote with realistic allowances that's slightly higher is usually the better deal.
Fewer unknownsShrinking both
The best way to manage contingency and allowances is to have fewer of them.
- Make the selections during design. Choose the tapware, tiles, appliances and fittings before the documentation is finished. Every item chosen is a prime cost item that disappears from the contract.
- Investigate the site early. A soil report and an asbestos survey before pricing turn unknowns into known costs.
- Document thoroughly. Clear drawings and specifications leave less room for interpretation, and less need for a builder to price risk.
- Bring the builder in early. A builder who has priced the design as it developed knows the job, and can set realistic allowances where some uncertainty remains.
Some uncertainty never goes away. Ground conditions can't be known for certain until the digging starts, and an existing house always has surprises. That's what the contingency is for.
Who carries the riskWhat a fixed price does and doesn't cover
A fixed-price contract moves many risks to the builder: their own productivity, the price of most materials, the cost of the work described in the documents. It doesn't move them all. Conditions nobody could reasonably have seen, such as rock below the surface or contamination in the ground, usually stay with you, either through a provisional sum or as a variation. Neither do the changes you ask for once work has started.
Knowing where the line sits is the point of reading the contract carefully, and the point of holding a contingency.
Applying it locallyCanberra and New South Wales
Canberra. Knockdown sites carry the most uncertainty: fixed asbestos in older houses, disturbed ground after demolition, and the chance of extra piering. Rock in the hill suburbs is a common provisional sum. Allow toward the upper end of the contingency range for any of these.
New South Wales. Residential building contracts must be in writing, and they set out each prime cost item and provisional sum, along with the builder's margin on any increase. Sloping and coastal sites often carry provisional sums for excavation, retaining and drainage.
Renovations everywhere. Hold the larger contingency. The older the house, the more likely it is that something behind the linings needs fixing once it's opened up.