Property Analysis
How Much Contingency Should You Allow for a Property Refurbishment?
A refurbishment budget tells you what you expect the works to cost. A contingency prepares you for what you didn't expect. The right allowance depends on the property, the project and how much uncertainty you're taking on.
What is a refurbishment contingency?
A refurbishment contingency is money set aside within the project budget to cover costs that weren’t fully anticipated when the original estimate was prepared.
Imagine you’ve budgeted:
Refurbishment works: £40,000
You could proceed on the assumption that the final bill will be exactly £40,000.
Or you could recognise that renovation involves uncertainty and allocate additional capital for unexpected costs.
That’s your contingency.
Importantly, contingency shouldn’t be treated as money you’re planning to spend.
It’s protection against the project costing more than expected.
Is 10% contingency enough?
You’ll often hear investors use 10% as a rule of thumb.
It can be a useful starting point.
But there isn’t one contingency percentage that’s appropriate for every refurbishment.
Consider two projects.
PROJECT A
A relatively modern property requiring:
decoration
flooring
a new kitchen
a new bathroom
minor external works
PROJECT B
A much older property requiring:
structural alterations
complete electrical works
new plumbing and heating
roofing work
damp investigation
new windows
major internal reconfiguration
Applying exactly the same contingency approach to both projects ignores the enormous difference in uncertainty.
The more you don’t know about the property, the more important contingency becomes.
Start with the quality of your original budget
A percentage contingency doesn’t rescue a poor refurbishment estimate.
If the project is likely to cost £60,000 but you’ve entered £40,000 into the spreadsheet, adding a 10% contingency gives you £44,000.
You don’t have a contingency problem.
You have a budgeting problem.
Before deciding how much contingency to hold, make the base refurbishment budget as realistic as possible.
Break the project into individual workstreams.
For example:
demolition and clearance
structural works
roofing
windows and doors
electrical
plumbing and heating
kitchen
bathrooms
plastering
carpentry
decoration
flooring
external works
professional fees
waste removal
scaffolding
Then add contingency to a budget you actually believe.
Why refurbishment costs increase
Projects exceed budget for several different reasons.
HIDDEN DEFECTS
Some problems only become visible once work begins.
Floorboards come up.
Walls are opened.
Old fittings are removed.
Suddenly the building tells you considerably more about itself than it did during the viewing.
SCOPE CHANGES
You decide to improve the specification or undertake additional work during the project.
That’s not necessarily an unexpected cost.
It’s a change to the project.
ESTIMATING ERRORS
The original budget simply underestimated the amount of labour or materials required.
PRICE CHANGES
Material, labour or subcontractor costs can change between estimating the project and completing the work.
DELAYS
A longer project can increase finance, insurance, utilities and other holding costs even if the building work itself remains close to budget.
These risks should be considered separately rather than hiding everything inside one contingency figure.
A simple percentage approach
For early-stage investment analysis, applying a percentage to the refurbishment budget can be useful.
For example:
Base refurbishment budget: £50,000
At a hypothetical 10% contingency:
£50,000 × 10% = £5,000
Total works allowance:
£55,000
If you wanted to test a more conservative scenario at 20%:
£50,000 × 20% = £10,000
Total works allowance:
£60,000
The purpose isn’t to decide that either percentage is universally correct.
It’s to understand what a cost overrun does to the investment.
Contingency should reflect uncertainty
Rather than choosing a percentage automatically, think about the project’s unknowns.
Ask:
How old is the property?
How much can actually be inspected?
Are structural alterations planned?
Is there evidence of damp or movement?
What condition are the roof and drainage in?
How old are the electrics?
How old is the heating system?
Are there previous alterations?
Is planning or building control involved?
How detailed are the contractor quotations?
Has an appropriate survey been carried out?
How experienced is the project team?
As uncertainty reduces, your understanding of the likely costs should improve.
Separate building contingency from holding-cost contingency
This is an important distinction.
Imagine a refurbishment is expected to take four months.
Your building works might stay within budget.
But if the project takes six months instead, you may incur another two months of:
mortgage or bridging interest
council tax where applicable
utilities
insurance
security
storage
other project costs
A building contingency doesn’t necessarily account for a time overrun.
For a financed refurbishment, both cost risk and time risk should be modelled.
Don’t forget professional and statutory costs
The contractor’s quote isn’t necessarily the complete refurbishment budget.
Depending on the project, you may also need to consider costs associated with:
architects
structural engineers
surveyors
planning
building control
party wall matters
specialist reports
warranties or certification
Not every project requires all of these.
But excluding relevant professional costs can make a project appear cheaper than it really is.
Contingency affects your return
Imagine:
Purchase price: £250,000
Acquisition and finance costs: £20,000
Refurbishment: £50,000
Expected total project cost:
£320,000
Expected finished value:
£375,000
On the initial numbers, there appears to be:
£55,000
between project cost and finished value.
Now suppose refurbishment costs increase by 20%.
Works become:
£60,000
Total project cost becomes:
£330,000
The gap has reduced to:
£45,000
And that’s before considering tax, selling costs, refinance costs or any other amounts relevant to the strategy.
The end value hasn’t changed.
The property hasn’t changed.
But your economics have.
What if costs rise and the end value falls?
This is where stress testing becomes particularly powerful.
Investors often analyse risks individually.
But problems don’t always arrive individually.
Consider:
BASE CASE
Refurbishment: £50,000
End value: £375,000
DOWNSIDE CASE
Refurbishment: £60,000
End value: £350,000
Your costs have increased by £10,000 at exactly the same time as your expected value has fallen by £25,000.
The investment case has moved by £35,000.
That’s far more revealing than simply adding 10% contingency to the works.
Contingency is also a capital question
It’s possible to have a profitable project on paper and still run into difficulty because you don’t have enough cash to finish it.
Suppose the project requires £50,000 of refurbishment.
You have exactly £50,000 available.
If an unexpected £7,000 problem emerges, where does that money come from?
Additional borrowing may not be available.
Selling halfway through a refurbishment may be unattractive.
Delaying works can create further holding costs.
Contingency therefore isn’t only about protecting your projected return.
It’s about making sure you have enough capital to complete the strategy.
Don’t spend the contingency before you need it
There’s another trap.
A project is progressing well and the contingency hasn’t been used.
So the specification starts improving.
More expensive flooring.
A better kitchen.
Additional landscaping.
Suddenly the contingency has become an upgrade budget.
Then a genuine unexpected problem appears.
The money has already gone.
Keep contingency separate from planned improvements.
If it’s still unused when the project finishes, that’s a good result.
The Property Thesis approach
We wouldn’t look at a refurbishment contingency in isolation.
We’d test the complete project.
BASE WORKS
What should the planned refurbishment realistically cost?
CONTINGENCY
What additional capital is available for unexpected building costs?
TIMESCALE
What happens if the project takes longer?
CAPITAL
Is sufficient cash available to complete the project if costs increase?
END VALUE
What happens if the finished property is worth less than expected?
FINANCE
How do additional costs or delays affect borrowing and interest?
EXIT
Does the sale or refinance still work under a downside scenario?
The objective isn’t to predict every problem that might occur.
That’s impossible.
The objective is to build an investment case that doesn’t require everything to go perfectly.
Related resources
The objective is to build an investment case that doesn't require everything to go perfectly.
Frequently asked questions
What is a refurbishment contingency?
A refurbishment contingency is additional money set aside to cover costs that weren't fully anticipated within the original renovation budget.
Is 10% enough contingency for a property renovation?
There is no single percentage appropriate for every project. A percentage such as 10% can be useful for scenario planning, but the appropriate allowance depends on the property's condition, project complexity and level of uncertainty.
Should contingency be included in my total project cost?
Yes. If the capital may be required to complete the project, it should form part of your assessment of the project's potential cash requirement rather than being ignored because you hope not to spend it.
Should I allow for renovation delays as well as cost overruns?
Yes. A project taking longer than expected can increase finance, utilities, insurance and other holding costs even when the building works remain close to budget.
What happens to my contingency if I don't use it?
If the project is completed without using the contingency, the unused capital hasn't become a project cost. That can improve the eventual return compared with the downside scenario you allowed for.
ANALYSING A REFURBISHMENT?
See what happens when the budget moves.
Property Thesis Analyse is designed to stress test refurbishment costs, end value, finance and exit assumptions so you can understand whether the investment still works when the project doesn't go exactly to plan.
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Property Thesis provides research and analysis tools for informational purposes. Content does not constitute mortgage, investment, tax, legal, valuation, surveying, planning or building advice. Property values, refurbishment costs, rental income and finance availability are assumptions that require appropriate due diligence and professional advice where relevant.