When thinking of budget there are actually few budgets that you need to plan. Let’s start from the beginning of the project:
In early design phases you’ll count everything that you want done and arrive at a number. Let’s say you are remodeling your kitchen and cabinets and appliances will cost 100. We can call it Initial Budget.
In the next phases of design, more things are going to become obvious and necessary to address. For example you will realize that you need to move a wall in order to fit a new fridge. That will push your budget to 150 and we will call it Design Budget.
When you start talking to contractors they will tell you that even though you don’t have to change your plumbing, now is the best time to do it and that in their experience electrical needs to be changed to satisfy the new code requirements. That will push your budget to 200, and it’s your Construction Budget.
During the construction, when the contractor pulls down the gyp board from the wall he will discover that there was a leak long time ago and that part of the wood structure is rotten and moldy and has to be replaced. That will push your budget to 250 and it‘s called your Reserve for Construction.
And on top of that you need to push your budget to 300 to create a reserve for any other unplanned circumstance. We will call it Total Funds Available.
Important thing to keep in mind is that 300 needs to be available in liquid funds ready to be spent on a day notice. It cannot be in a credit line that you need to get approved, or in funds that are “almost certainly” going to come in two months, or in stocks that you might be forced to sell not at the best moment.
Please don’t cheat on this math. I know it sounds very inefficient to set aside half of your budget for unplanned, but don’t forget that The Worst Self-inflicted Disaster that can happen to your project is running out of funds midway through construction. At the end, it’s very easy to spend leftover money, but very painful to get extra funds.
Now, do the math in the other direction starting with the Total Funds Available working towards the Initial Budget. If your Total Funds Available are 100, your Initial Budget is 33, Design Budget is 50, Construction Budget is 66 and your Reserve for Construction is 16.