Contingencies
The line in your budget for the costs nobody could name in advance, whether that budget covers a year of operations or a single capital project.
A contingency line is money set aside in a budget, operating or capital project, for costs nobody itemized. It is not a reserve for known future replacements, and not a special or emergency assessment for a shortfall. Sizing it is a board policy call with no universal formula, and a well-sized one means fewer surprise requests to owners.
Contingency, reserve, and emergency assessment are three different lines
A contingency line is not a synonym for reserves. A reserve funds work the board already expects, replacing a roof, repaving a lot, anything identified years ahead in a reserve study. A contingency line funds work the board did not expect: a vendor increase nobody predicted, a legal bill, a change order on a capital project that adds cost mid-project. The three lines side by side:
| Line item | What it funds | Who decides | How it gets approved |
|---|---|---|---|
| Contingency | Unbudgeted costs inside the year's operating or project budget | The board, when it adopts the budget | Part of the regular budget vote, no separate action |
| Reserve | Known future replacement of major components the reserve study identifies | The board, guided by the reserve study | A board funding-goal choice: full, threshold, or baseline funding |
| Emergency assessment | An extraordinary expense nobody could have foreseen, or a safety threat | The board, only on narrow grounds where the law allows it | Varies by state; check your statute and bylaws for what qualifies and what the board must document |
Sizing the line is a policy choice, not a formula
There is no standard percentage that makes a contingency line correct. A board sets it by looking at its own history: how often has an unbudgeted cost hit this association in the last few years, and how large were those hits? A quiet association with stable vendors can run a smaller line than one mid-renovation.
Capital projects deserve their own contingency, sized against the risk of a change order, not against the operating budget. Older buildings, unopened walls, and site work all raise the odds a contractor finds something the original scope did not price. Some governing documents set a required contingency percentage for capital projects specifically, so check your CC&Rs and any construction contract's own contingency clause before assuming the board has full discretion here.
When the contingency runs out
A depleted contingency line does not automatically unlock an emergency assessment. Routine underbudgeting, guessing too low on a vendor renewal, does not qualify as an emergency in jurisdictions that define the term narrowly; the expense has to be extraordinary and something the board could not reasonably have foreseen when it built the budget. Where that grounds test does not apply, the board's next move is usually a regular assessment increase or a special assessment, and some states cap how far a board can go without asking members to vote.
"the board may not impose a regular assessment that is more than 20 percent greater than the regular assessment for the association's preceding fiscal year or impose special assessments which in the aggregate exceed 5 percent of the budgeted gross expenses"
Source: California Civil Code Section 5605, State of California
This 20 percent and 5 percent structure is California's rule specifically. Other states set different thresholds, or none at all, so confirm the cap that applies to your association before assuming a shortfall can be closed without a member vote.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
Your association budgets a $20,000 contingency line for the year. A surprise legal bill for $6,000 hits in month three. What should the board do?
A capital project's change order for unforeseen site conditions costs more than the project's contingency line. What should the board treat this as?
In California, a board's contingency line ran dry because the board underbudgeted routine landscaping costs, not because of a surprise. Can the board levy an emergency assessment without a membership vote for the shortfall?
Sources
- California Civil Code Section 5605, Assessment Increases: Requirements and Limitations, State of California
- California Civil Code Section 5610, Emergency Assessments, State of California
- California Civil Code Section 5550, Reserve Study Requirements, State of California
- National Reserve Study Standards glossary, Community Associations Institute (CAI)
Capital Projects
Once your contingency line is set, the next question is how it feeds the reserve contribution your budget funds every year: see Reserve contributions.
Whether your governing documents require a specific contingency percentage for capital projects, and how a shortfall beyond the contingency line gets funded, a capped assessment increase, an emergency assessment, or a membership vote, varies by state and by your own bylaws.