Every day an entrepreneur, business person, or a general go-getter has big ideas and wants to make them a reality. They may find the perfect piece of land to develop and go to the bank straight away for a loan to make things happen. But, what happens when your development doesn’t go to plan and something unexpected pops up? More often than not dreams are shattered, people are broke and have no idea what their next step is. If only they had been told they might need a contingency plan!
Sometimes you just cannot predict the future, no matter how much effort goes into the feasibility phase of a project (which we highly recommend you undertake a feasibility study) and issues start coming up unexpectedly. This can be as simple as the council or construction team has changed their prices, or it can be as complex as discovering unknown underground services once excavations commence. Extra money is almost always required when issues arise, but many people do not consider this when obtaining a loan.
The risk taken by not obtaining some contingency money varies from job to job, but in most cases the impact can be heavily felt by the client. Not only does a lack of contingency hurt the client, it also hurts the construction workers, engineers, sub-contractors and any other companies which have put a lot of time and effort into the project and suddenly cannot get paid for their services.
To avoid any surprises, we always recommend budgeting more than required. How much more? Well, this all comes down to whether or not a feasibility study has been undertaken to reduce the risk involved, the size of the project, and the financial status of the client. For smaller projects, 10 % is typically recommended and that can usually cover the majority of the extra costs. For larger projects, this number could be as high as 30 %.
There are two situations which may occur. Number 1, the project may run smoothly and you won’t need the contingency money. This is great, and the extra money can be put straight back onto the loan. Number 2, the project needs the contingency money and you have it sitting there ready to go when needed, and the project still gets completed on time. Either way, it is a win-win situation. So next time you come up with a big idea, have a think about the feasibility study to identify as many risks as possible, and consider contingency monies to 100 % ensure your project can get across the line.