Set a start-up contingency from quote certainty, hidden-work risk and irreversible commitments instead of adding one arbitrary percentage to every cost.
Short answer: Do not add one percentage to the whole budget. As a working guide, add 5% to current fixed quotes, 15% to scoped but unquoted items and 30% to hidden, approval-dependent or first-time work. Keep a separate working-capital buffer, and model any single risk large enough to exceed the general contingency as its own decision.
A flat 10% looks disciplined because it produces a precise total. It can overfund a prepaid insurance quote that cannot move and underfund old-premises electrical work whose scope remains unknown.
Contingency is not money for extra features. It protects the agreed opening scope from uncertainty already present. If you spend it upgrading finishes, the original risk has not disappeared.
Build the Risk-Band Contingency Stack
The Risk-Band Contingency Stack assigns each setup item to one of three evidence bands.
- Quoted: Evidence available: Written current price and fixed scope; Opening allowance: 5%; Typical item: Standard equipment with confirmed delivery
- Estimated: Evidence available: Scope known, final supplier or quantity uncertain; Opening allowance: 15%; Typical item: Initial stock based on an expected mix
- Exposed: Evidence available: Hidden condition, approval or first-time integration; Opening allowance: 30%; Typical item: Repairs behind an existing wall
These percentages are indicative working assumptions, not industry facts. Replace them with supplier terms, survey evidence and your own experience. A fixed non-refundable quote may need less than 5%. A structural unknown can need more than 30% or a decision to investigate before committing.
My position is that a large unknowable cost should never be hidden inside a general percentage. Price the investigation, obtain a capped scope or keep the commitment reversible.
Clean the base budget first
Contingency cannot rescue an incomplete list. Separate one-off setup, opening stock, deposits, working capital and owner living costs. Record tax treatment consistently and put each cash payment on its actual date.
For every line, name the quantity, supplier or evidence, quote date, inclusions, exclusions and refundability. “Equipment, £8,000” is not a budget line. It is a heading. Delivery, installation, training, adapters, safety checks and insurance changes may sit outside the sticker price.
Remove aspirations from the opening scope. Divide items into required before the first responsible sale, required after proven volume and optional. Contingency applies to the first group. It should not create permission to buy the second and third early.
Assign risk from evidence, not anxiety
Put a line in the quoted band only when scope and price are written, current and comparable with what you will buy. Check expiry, delivery, tax, exchange rate and cancellation terms.
Use the estimated band when the item is understood but a variable remains. You may know the number of chairs but not the final fabric, or know the stock budget but not the product mix. Record the uncertain driver beside the allowance.
Use the exposed band for hidden conditions, permissions, unfamiliar installations, custom imports or work dependent on another supplier completing first. The 30% figure does not make these safe. It flags where investigation can be worth more than a larger reserve.
Pull large risks out of the stack
Set a materiality threshold before reviewing risks, such as 10% of available contingency or one week of working capital. If a single event could exceed it, model that event separately.
Suppose a landlord may require £6,000 of ventilation work. Adding £600 through a flat 10% does not address the exposure. Obtain written responsibility, commission an inspection, negotiate a cap or reject the premises. A contingency fund should absorb ordinary variance, not a known unresolved commercial term.
Look for correlated risks. A delayed fit-out can create extra rent, contractor remobilisation and postponed sales together. Three small line allowances may understate one shared cause. Build a delayed-opening scenario with all three effects.
Worked example: CanalStep Dance Studio
CanalStep is preparing a small dance studio in leased premises. Its base setup budget is £24,800 before working capital.
- Current fixed quotes: Base items: £13,000; Allowance: 5%; Contingency: £650
- Scoped but unquoted items: Base items: £7,800; Allowance: 15%; Contingency: £1,170
- Hidden or approval-dependent work: Base items: £4,000; Allowance: 30%; Contingency: £1,200
- Total: Base items: £24,800; Allowance: Mixed; Contingency: £3,020
The contingency is £650 + £1,170 + £1,200 = £3,020. As a percentage of the whole base, that is £3,020 ÷ £24,800 × 100 = 12.2%. The funded setup total is £27,820.
A flat 10% would provide £2,480, which is £540 less. More importantly, it would not show that £4,000 of electrical investigation and change-of-use work carries most of the uncertainty.
The landlord then confirms that CanalStep could be responsible for a separate fire-door change costing up to £5,500. That amount exceeds the entire £3,020 reserve. The owner does not raise contingency to hide it. They make written landlord responsibility and approval a condition before signing.
Licensing, change of use, fire safety, accessibility and lease obligations vary by country and premises. CanalStep must obtain advice from qualified local property, legal and safety professionals. The arithmetic organises financial exposure; it does not establish compliance.
Keep working capital separate
Setup contingency covers variance in becoming ready to trade. Working capital covers the lowest cash point while customer receipts catch up with operating payments. Keep two lines and two rationales.
If a £1,000 fit-out overrun consumes money reserved for payroll, the business was not funded for both risks. Recalculate the opening cash trough after any contingency is spent because delay can alter rent and receipt timing.
Tax reserves and refundable customer money are not contingency. They remain obligations. Do not present a large bank balance as flexible when parts already have owners.
Control the reserve after opening work begins
Require every draw to name the original budget line, cause, amount and remaining reserve. Approve scope changes separately. A cost caused by choosing a premium finish is not contingency use.
Update the risk bands when evidence changes. A £3,000 estimate that becomes a fixed £2,700 quote can release part of its allowance. Do not spend the release until other exposed items are resolved and the opening date remains credible.
Return unused contingency to cash reserve after the setup is complete. Do not treat it as a final shopping list.
Related guides
Set the amount this week
Today, rewrite every base-budget line with quantity, source, date, inclusions and exclusions. Tomorrow, remove optional items and separate working capital. Assign the remaining setup items to the 5%, 15% and 30% evidence bands.
By day four, list every single event that could exceed 10% of the calculated reserve. Obtain a quote, inspection, contractual cap or exit condition for each. On day seven, fund the base, risk-band contingency and working-capital trough separately. Do not sign an irreversible commitment until all three have a credible source.
Frequently asked questions
Is 10% enough contingency for a new business?
Sometimes, but the percentage alone tells you nothing about the uncertainty. Ten per cent may be excessive for current fixed quotes and inadequate for old-premises repairs, imported equipment or approvals. Split costs into evidence bands and calculate each allowance. Then model any single material risk separately. If the combined result happens to equal 10%, that is evidence-led. Do not reduce a 16% result to 10% because the round number feels normal. Check the assumptions against current quotes and sector conditions.
Should contingency include working capital?
No. Keep setup contingency and working capital separate. Contingency covers variance in the cost of becoming ready to trade. Working capital covers timing gaps after opening, such as wages or stock paid before customer receipts. They can interact when a delay adds rent and postpones sales, so update both schedules after a material change. Separate lines prevent one reserve being spent twice. Also keep tax, deposits committed to delivery and essential personal runway outside both unless their purpose is explicitly modelled.
What if I cannot afford the calculated contingency?
Reduce scope, investigate exposed items, negotiate fixed or capped pricing, stage the launch or postpone the commitment. Do not lower the allowance without reducing the underlying risk. Optional finish, broad opening stock and long leases are common places to regain flexibility. Protect cash before ambition. If the minimum responsible setup plus working capital remains unfunded, the business is undercapitalised. Borrowing may move timing but adds repayment and downside. Obtain qualified financial advice before using debt merely to preserve an ambitious opening plan.
Do fixed quotes need any contingency?
Usually a small amount, because delivery, installation, exchange rates, tax, quote expiry or scope interpretation can still move. Five per cent is a working starting point, not a rule. A truly fixed, all-inclusive, prepaid local service may need less. Read exclusions and cancellation terms before assigning the band. If the supplier can increase price or the quantity remains uncertain, it is not fully fixed. Record the reason for any zero allowance so another person can review it rather than assuming the risk was forgotten.
Should I tell a lender about the contingency?
Yes. Present the base budget, risk-band calculation, working-capital need and stress cases clearly. Show the calculation separately. A contingency is evidence of planning, not an admission that the numbers are careless. Do not inflate supplier costs to conceal it or describe borrowed money as optional cash. Loan terms may restrict uses or require evidence. Finance, security and personal-guarantee consequences vary, so seek regulated financial and qualified legal advice. Ensure the repayment forecast still works if part of the contingency is spent.
How do I budget for a risk I cannot price?
First pay to reduce the uncertainty where practical: inspect, survey, test, obtain a sample or clarify contractual responsibility. If a credible range still cannot be established and the risk is material, keep the commitment reversible or walk away. A percentage does not convert an unknown into a safe cost. For a small unavoidable uncertainty, use the exposed band and document the maximum cash you can tolerate. Set a stop condition before work begins so sunk cost does not force further spending.
What happens to unused contingency?
Keep it as business cash until setup is complete, every final invoice is received and the opening delay risk has passed. Then move it deliberately to working capital, emergency reserve or another approved use. Do not let suppliers or staff treat the unspent amount as permission to improve specifications. Record the transfer so the budget retains an audit trail. Tax and accounting presentation may differ from the management reserve, so ask a qualified local accountant how actual costs and remaining cash should appear.
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