Contingency is added on to your estimate to cover unforseen issues on the project that could result in additional costs that weren't in your original budget. 

Contingency covers things such as :

  1. Unforseen repairs (you open up a wall and find knob & tube wiring that needs to be replaced that wasn't in your budget)
  2. Change Orders (you add renovating a room, that wasn't in the initial plan) 
  3. Estimating Errors or Omissions (you miscalculate a quantity or forget an item in your estimate)

The amount of contingency will depend on the items listed above.  Is the project a cosmetic rehab or a gut rehab?  Do you anticipate changes or additions to the Scope of Work?  Are you comfortable estimating costs?  Did you get Contractor bids?

If you do not anticipate many issues listed above, you could carry as little as 5 to 10% contingency.  If you anticipate several issues you many consider 25%+ contingency on your project.