Contingency

What it is

Every project I do, I add at least a 10% financial contingency. If I think the project’s going to cost $50,000, I put $5,000 aside. That’s 10% of $50,000.

Things are going to come up. We might open a wall and find something new. I might have put something in the budget where I just didn’t think through it enough — being hasty, that’s usually the case — and now I can’t get the bid to work. So I have to pay a little extra. That’s okay. These are budgets I’m setting for myself and I’m going to through project management try to hit them, but I’m not going to ask a guy to do a $5,000 job for $3,000 if I missed.

Contingency is not profit. It’s protection. And if the deal doesn’t work with a financial contingency, it’s just a bad deal. You’ve got to get a better deal.

Why it matters

I hear people out there who want to get every dollar out of contractors and shortchange guys to protect their margin. That really pisses me off. Those guys are trying to make a living. Working with them and helping them make a living is what keeps them around for a long time. You make your money by being smart. By underwriting the deal right from the beginning. Not by taking food off other people’s plates.

The contingency is how you deal with the fact that you can’t predict what’s inside the walls. I’ve opened walls expecting cosmetic work and found plumbing that needed to be completely replaced. I’ve bought houses where the sewer scope looked fine and the line collapsed on day one of demo. You cannot price those things ahead of time. You can only make sure you have budget to absorb them when they show up.

I also sometimes put what I call the juice on the rehab costs when I’m making an offer — a little extra added to the rehab number so I can start with a lower anchor on the acquisition price. That’s a sales move, separate from contingency. But the contingency is real: that’s money I’m not touching unless something actually goes over.

How it shows up

The auto adds bank inside the Fliporithm has a handyman budget built in — $1,200 bucks. I have that worked in whether I end up using every dollar of it or not. Same principle as contingency. I’d rather have more in the budget and come in under than scramble to find money when something goes sideways.

When I’m adding budget, I always tend to add rather than take away. If we end up being able to save some and reuse it, we just save budget. That’s the right mindset on contingency too — you’re not hoping to spend it, you’re just making sure you can.

Related

auto adds, fliporithm, scope of work, the juice, change orders, holding costs