A contingency fund is one of the most important parts of a construction loan. It is not extra money for upgrades. It is protection.
A contingency is usually 5–10% of the construction budget set aside for surprises such as site issues, code changes, material price increases, or necessary design adjustments.
Lenders require contingency because construction never goes exactly as planned. It protects the borrower, the lender, and the builder by reducing the chance the project stalls.
Bottom line: contingency is the shock absorber that keeps your project moving forward when reality doesn’t match the plan.