What Is a Contingency Reserve?

By Frank Bass – Updated Apr 2, 2025 at 10:50 PM EST

Key Points

A contingency reserve is a budget set aside for unexpected costs during a project.
Its purpose is to mitigate the effects of a project going over budget or experiencing delays.
Investors use it to mitigate financial risks associated with project overruns.

Boxer Mike Tyson once observed that everyone has a plan until they get hit in the face. His axiom holds true in business as well, including real estate development. Just as boxing matches result in being hit in the face, many projects result in delays and cost overruns. Because of the risks, developers often create a contingency reserve. We’ll tell you about how they’re created, how they’re used, and why they’re important.

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Workers inside framed building at construction site. — Image source: Getty Images.

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Calculating the Percentage of an Over-Budgeted Amount

Discover the importance of calculating the percentage over budget for precise expense analysis.

Expected monetary value: The expected monetary value (EMV) calculation assigns a probability to individual components of a project. For example, the best estimate for the cost of concrete for a project might be $650,000. But there’s also a 35% chance that concrete costs will rise to $750,000. There’s only a 15% chance that the cost of concrete will fall to $550,000. Multiplying each potential cost by its probability yields a total of $670,000 for concrete:

15% * $550,000 = $82,500

50% * $650,000 = $325,000

35% * $750,000 = $262,500

The total budget for concrete would be $82,500 + $325,000 + $262,500, or $670,000; an appropriate contingency reserve for the concrete might be 10%, or $67,000 of the total contingency reserve.

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About the Author

Frank Bass is a contributing Motley Fool stock market analyst and editor covering energy, healthcare, consumer, and financial sectors. Frank has decades of experience in financial journalism, holding reporting and editing roles at The Wall Street Journal, The Associated Press, and Bloomberg. He also currently edits research on the global energy transition. He holds a bachelor’s degree in journalism from Texas Tech University and is a graduate student at the University of Alaska Fairbanks. Fun Facts: Frank has hiked The Long Trail in Vermont from end to end, and currently lives in a semi-dry cabin in Interior Alaska.

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