Having enough money to finish a project means providing for the unknown. Previous blogs showed how to use project contingencies and a program reserves to prepare for the unexpected. Let’s add another tool: contract contingency allowances.
What is a construction allowance?
Well-executed designs often identify construction work that needs to be done but cannot be accurately quantified on the plans. It is common practice for your designer or construction manager to structure the construction contract to include a contingency allowance that provides for such unknowns. This allows the unknown amount of work to be purchased at competitively bid prices rather than change order pricing. After allowance work is complete, the contract amount is adjusted based on the actual amount of allowance work done.
Let’s take a simple roof replacement. While you may know that some roof sheathing needs to be replaced, you won’t know exactly how much until you remove the waterproof membrane. A good way to handle this situation is to require bidders to include a contingency allowance for sheathing replacement in their bid price. This contingency allowance is included in the total contract amount, but may only be used upon approval of the owner.
Even the best planned designs have unknowns. There is no such thing as a perfect set of drawings. There will be changes for:
Changes that arise during construction can often be contentious. Allowances also foster a better working relationship by ensuring the contractor that amounts have been set aside to provide for the inevitable changes that arise. Negotiated contracts, such as a lease lease-back agreement with a guaranteed maximum price, are typically set-up with a number of allowances (electrical, interior finishes, site work, et cetera). Contract contingency allowances may also provide incentives to a contractor by sharing any unspent allowances at contract close-out. Key to effective use of contingency allowances is the review and approval of each instance in which an allowance is used.
Combined with project contingencies and program reserves, contract contingency allowances serve as a front-line defense to ensure that you have enough money to finish your project.