Contingency adequacy is one of the first things a lender tests on a development proposal, because the contingency is what stands between an ordinary problem and a request for more money.
The usual answer is a percentage. A percentage of what, covering which risks, is a much better question and it is answered far less often.
A percentage is not evidence
A round percentage of construction cost tells a credit team nothing about the scheme in front of them. It is a convention, and conventions describe the average project rather than this one.
Two schemes of the same value can carry entirely different risk profiles. A new build on a clean, surveyed site with a complete design and a fixed price contract is not the same proposition as a refurbishment with a thin survey and a large proportion of provisional sums.
The useful test is therefore not whether the percentage is high enough by convention, but whether the allowance is built from the risks this scheme actually carries.
What to ask for
The risk register. If one exists, the conversation is straightforward: each item can be examined, valued and tested against the allowance.
If one does not exist, that is the finding. A contingency with no register behind it is a number, and a number cannot be released, tracked or defended.
The follow up questions are about coverage rather than quantum. Does the allowance contemplate ground risk, and has a ground investigation been done. And does it contemplate the undefined provisional sums, and how many are there. Does it contemplate inflation if the contract is not fixed price.
Where it needs to be larger
Refurbishment and conversion, where the existing building is the main unknown and the survey programme determines how much of it has been resolved.
Schemes going to tender on an incomplete design, where a high proportion of value sits in provisional sums that are not defined.
Constrained urban sites with party wall matters, basements, restricted access or statutory diversions.
Long programmes, where inflation and market movement have more time to operate.
Schemes with a single specialist package dominating the cost, where the failure or unavailability of one supplier moves the whole position.
Client held versus contractor held
A contingency inside the contractor's price is not available to the client and will not be returned. It has been spent whether or not the risk occurs.
A client held contingency, outside the contract sum, is available and can be released as risks retire. For a lender, only the second one is a defence.
That distinction should be explicit in the drawdown schedule, along with the rules for releasing it: what it can be spent on, who approves, and what evidence is required. Agreeing that at the outset avoids a dispute at the fourth drawdown.
Track it, do not just set it
Contingency adequacy is not a question answered once at appraisal. It is answered every month, because both the remaining risks and the remaining allowance change.
The useful report shows what has been drawn, what has been released because a risk retired, and what remains against what is still open. A single reducing figure with no explanation tells a credit team nothing.
Where the allowance is being consumed by ordinary change rather than by risk events, that is a specific and important finding, because it means the protection is being spent on something it was not intended for. The wider reporting discipline is set out in cost to complete.
The awkward finding
Sometimes the honest answer is that the contingency is inadequate and the facility does not complete the building on realistic assumptions. Saying that at appraisal stage is unwelcome and it is the entire reason for the appointment.
The alternative is discovering it at drawdown eleven, when the options are additional equity, a restructure or a stalled site, and when the borrower's negotiating position has improved considerably because the lender is already committed.
That is why independence has to be structural rather than a matter of good intentions, and why we do not act for a borrower and a lender on the same scheme in either order. Our position is set out under what we do for the lender side.
What this means for you
Ask for the register, not the percentage. If there is no register, the percentage is a guess and should be treated as one.
Then check whether the contingency is client held and whether the release rules are documented. Those two facts determine whether the allowance is a defence or a decoration. The related failure is described in quantity assumption risk.
Reviewing a facility and unsure the contingency holds?
Send the cost plan and the risk register. We will tell you what the allowance covers and where it does not reach.