Specifying Allowances

Archive of Older Topics Archive - Specifications Discussions #2
1

What is the reasoning behind why cash allowances only include the material cost and taxes, and not labor, overhead and profit, and the “other expenses contemplated” as described in A201 3.8.2.2? A201 states these other items shall be included in the Contract Sum. I know we studied this in my CDT training, but I forget, and PRM 4.6.2 is not helping.

How can the contractor guess what labor is involved if the allowance is a contingency for repairing unforseen conditions?

I cornfoozzzed. There must be some logic I’m not getting my mind around.

2

The concept is that the labor costs would not be variable. The classic example being brick: all the same size and spec, but different costs for different colors. Of course, in reality there could be differences in labor (what if the selected color brick has a significantly different suction rate). I don’t like cash allowances very much, in part for this reason. Some of our public clients have included, if you can believe it, a cash allowance for unforeseen conditions, against which T & M work is billed. That way they can claim that there were no change orders because the base contract didn’t go up. YUCK! This is not the case here in Massachusetts because public work cannot use cash allowances.

3

Typically cash allowances are used where you know the quantity of product, but the range of cost of satisfactory product or the specific color, texture etc. is quite wide. Such as brick, sometimes one brick may meet the same performance level and installation costs as another brick that may be of a different color but the color and texture may make a major difference in the cost of the material.
For rehab work or unforseen conditions that you can define, its better to request unit prices for labor and material, because there its the quantity that is unknown.

4

Brick is one example, but other examples include decorative light fixture or front door (especially in residential work), tile work, or art work. They are most effective where some design decision can be put off without any impact to construction cost other than product purchase and delivery cost.

Public agencies will sometimes try to use (abuse) allowances to permit some flexibility in adjusting the cost of the work without impacting the Owner’s overall capital cost. Locally, I have seen “contingency” and “betterment” allowances established to cover unforseen conditions and needed changes without the need of going back to some budgeting oversight body (city council, school board, state legislature) for approval. Unit prices don’t really work in this situation because they essentially constitute prearranged agreements on calculating change order amounts, and change orders are exactly what these people are trying to avoid.

While I am sympathetic to the plight of public officials who really don’t have the required flexibility on these matters (and with good reason, I might add), such allowances are subject to too much foozling, and I have been told that they are not permitted on many types of public work in the State of Texas.

5

we use cash allowances frequently for interior finish and equipment items on long projects where the construction is expected to take 2 to 3 years. On health care projects, its not uncommon for the hospital administrator to change during the construction period, for the departments to shuffle around some during construction, requiring that the interior finishes also be re-selected. Health care equipment improves so quickly that we may not know the actual model number of the item that will be installed on the project, but we can get a projected cost from the manufacturer.

a note on unit prices, which of course is a different item: the idea behind unit prices is that the quantity is unknown, but you’ll get bad pricing unless you put some parameters on the quantity. Unit prices are used frequently in office building tenant build-outs, and if you don’t provide some suggested quantity and time line, you are going to get the highest price possible for the item. Its adviseable to state something like: “provide unit price for tenant interior doors and frames, as specified in section ______. Base unit price on a quantity of 100 doors, plus or minus 10%, and hold prices for 12 months.” this defines the risk as much as possible (2 doors or 500? hold prices for 30 days or 60 months?).

6

I think it worth mentioning that there can be two distinctly different types of “cash” allowances:

There is the typical product or material type of cash allowance - in either unit price format (i.e. brick per thousand, wall covering per square yard, hardware per opening, etc.), or in lump sum format (landscape allowance, signage allowance, etc.). For these types of allowances, it may very well be most appropriate to EXCLUDE labor from the allowance and have it included in the Contract Sum. With the material being a 'known entity" the bidder / contractor is better able to assign a labor value to it. Not perfect, but reasonable. For these, we include the following language in our specifications:

3.4 PRODUCT ALLOWANCES
A. The amount of each Product Allowance shall include:

  1. The cost of the product to the Contractor, based on unit price allowance indicated in the individual applicable specification Sections, less any applicable trade discounts.
  1. Appropriate waste factor for material specified.
  2. Delivery to the site.
  3. Labor required under the allowance, only when labor is specified to be included in the allowance.
  4. Applicable taxes.

B. In addition to the amount of each Product Allowance, include in the Contract Sum the Contractor’s reasonable costs for:

  1. Handling at the site; including unloading, uncrating, and storage.
  1. Protection from the elements and from damage.
  2. Labor for installation and finishing, except where labor is specified to be a part of the allowance.
  3. Other expenses required to complete the installation.
  4. Contractor’s and subcontractor’s overhead and profit.

The second type of cash allowance would be a contingency allowance, where neither the scope, material, nor extent would be known. For this type, it is appropriate to have the labor costs NOT included in the Contract Sum, but instead carried in the allowance. When it comes to contingencies, the contractor has no way of knowing what the money will be spent for, therefore he/she is unable to assign a labor cost to it. We include the following language for this type:

3.6 OWNERS CONSTRUCTION CONTINGENCY ALLOWANCE
A. Use of the contingency allowance shall be only as directed by the Architect for Owner’s purposes and only by CAEA, that indicate amounts to be charged to the allowance and for what purpose.
B. Contractor’s overhead, profit, and related costs for products and equipment ordered by Owner under the contingency allowance are included in the allowance and are not part of the Contract Sum. These costs include delivery, installation, taxes, insurance, equipment rental, and similar costs.
C. CAEAs authorizing use of funds from the contingency allowance will include Contractor’s related costs and reasonable overhead and profit margins.
D. Include in the Contract Sum a lump sum Owners Construction Contingency Allowance of $________________.

So, depending on what type of cash allowance you have, the provisions may be different.

7

Yes, the so-called contingency allowance is exactly what I was referring to above, as was Peter Jordan. I still think it’s a bit of hocus-pocus, since the process for determining how it is used up is the change order procedure. The only difference is that the accumulated change order cost is put into the contract price in advance. To me, it’s only a tad cleaner than a slush fund. (Never saw a design fee in one of these “contingencies” either.) I think its primary use is when a client’s board of directors or other higher-ups cannot be educated on what is reasonable to expect for change orders. This way it’s more-or-less hidden.

8

In common use, an allowance is the amount of money that can be spent, but as used in the A201 it has a special definition, one that does not lend itself to concealed conditions.

Modifying the general conditions may not really be necessary, as 3.8.2 says, “Unless otherwise provided in the Contract Documents…” Still, it seems that after going to great length to define what an allowance does and does not include, it would be confusing at best to change that definition, especially if allowances of more than one type are used.

If you know the types of work that will be required you can use unit prices, but that can be difficult. They must be carefully written to ensure that every possible detail is covered, the result often being a ridiculously long list of unit prices. And, as suggested by Anne, they must include reasonable estimated quantities - something that may be hard to determine when the work is concealed.

Another problem with unit prices is familiarity. Dirt contractors are comfortable with unit prices, but the average construction contractor may have difficulty working with them. Both the specifier and the bidder might spend a lot of time working on unit prices, only to come up with a bid amount that is incorrect.

In this case, I would use a contingency. There is no point in trying to define an unknown, or asking the contractor to include in the bid a specific amount for unspecified work, so why add one more way to screw up the bid? Just show the contingency on the overall construction budget, and use that contingency to pay the contractor by change order when you find out what must be done.

But, as noted by John and J. Peter, some owners like to play games. One of our clients required that change orders be approved by a board that met once a month - not conducive to maintaining a schedule; they also found it difficult to approve cost increases for any reason. Their project managers got around it by adding an assortment of “allowances” so they could complete the project without waiting for approval or increasing the project cost.

9

War story on allowances… once upon a time with a government agency as a client, we did an allowance for $1,000,000 – “New community building to be designed at a later date”. The main project was renovation of existing housing.

The client had to commit funds, or lose them, and didn’t have their act together enough to provide us with the program for the new community building. Well, the housing got done, but the community building never did. I often wonder what kind of fights we would have had in dealing with THAT allowance.

(Name anonymoused, to protect the guilty)