Construction allowance management an owner should insist on

An allowance is a promise to decide later with a number attached to the promise. Construction allowance management an owner controls comes down to three dates and one document, and without them the figure carried behaves as a floor rather than as a price.

What an allowance actually is

An allowance is a line in the price covering scope that has not been decided. The carpet has not been selected. The kitchen equipment has not been specified. The site work cannot be priced because nobody has commissioned the survey.

Rather than stop, the contractor carries a figure. Everybody agrees the real number will be established later, and the contract says the difference is reconciled when it is.

That is a reasonable mechanism and there is nothing wrong with it. A job that waited for every decision before pricing anything would never start.

The problem is how an allowance reads on a budget page. It looks exactly like a priced line. Same font, same column, same apparent standing. Nothing on the page distinguishes $340,000 that has been bought from $340,000 that is a placeholder for a decision nobody has made.

A guaranteed maximum price with twenty three allowances is a price for most of a building and a forecast for the rest of it, and the summary page does not say which parts are which.

Why the number tends to land high

Three reasons, and none of them requires anybody to behave badly.

The figure was set early, against less information. An allowance written at schematic design was set against an idea of the scope. By the time it resolves, the scope is drawn, specified and usually larger, because design development adds detail and detail costs money.

The decision is made by somebody spending an allowance rather than a budget. When an owner selects finishes against a carried figure of $340,000, the conversation is about which product is wanted. When the same owner selects against their own money with the difference payable this month, the conversation is different. The allowance changes the psychology of the choice.

There is no competition left. By resolution the trade is usually awarded. The subcontractor pricing the selected item is the one already on the job, and the price is a quotation rather than a bid. Whatever the reconciliation clause says, the commercial position has moved.

Put the three together and allowances on a typical job resolve above the carried figure more often than below it, and by more when they do. The distribution is not symmetric and nothing about the mechanism makes it so.

Construction allowance management an owner controls: three dates

Every allowance has three dates and most contracts name none of them.

The date the decision must be made. Not should. Must, driven by the procurement lead time and the sequence behind the installation. A selection made after this date costs money regardless of what is selected.

The date the price is fixed. The point at which the number stops being an allowance and becomes a cost. Without it the item drifts and is reconciled at closeout, which is the worst available moment because the work has been performed.

The date the reconciliation is reported. When you learn what it landed at. On most jobs this is a line in a monthly report two months after the fact, which is why an owner is frequently surprised by a movement that the project team has known about for a quarter.

Writing all three into the allowance schedule costs nothing before signature and is close to impossible afterwards. The second one does most of the work, because it converts a permanently open item into a bounded one with a deadline attached.

The document that goes with them

Each allowance needs a basis: what specifically the carried figure was built on. A product, a quantity, a specification section, a drawing reference or a stated assumption.

Without a basis, the allowance cannot be checked and cannot be argued about. An item carried at $340,000 with no stated basis is reconciled against whatever the contractor says it covered, and that conversation happens at the moment you have least room to move.

With a basis, three useful things become possible. You can test the carried figure against current pricing for the stated item before you sign. You can tell whether a later selection is inside the basis or outside it, which is the difference between a reconciliation and a change order. And you can see which allowances are carried against a specification that has since been superseded, which is the most common single finding in an allowance schedule.

Asking for the basis also produces information beyond the schedule. An allowance nobody can source is an allowance nobody built up, and that tells you something about how the rest of the number was assembled. The same logic applies to the qualifications page, covered in contractor contingency and owner contingency.

A worked example

A $44 million guaranteed maximum price carrying nineteen allowances totaling $3.4 million.

Four resolve in the first year. Flooring carried at $290,000 lands at $355,000, because the selected product is a grade above the basis. Kitchen equipment carried at $610,000 lands at $742,000, against a specification updated after the allowance was set. Landscaping carried at $180,000 lands at $171,000. Signage carried at $95,000 lands at $128,000 after a late brand decision.

Four items, carried $1.175 million, landed $1.396 million. Variance 18.8 percent, with three of four above.

Fifteen allowances remain, carrying $2.225 million. At the same 18.8 percent pattern they imply a further $418,000 of movement, which is information available in month thirteen to anybody tracking the variance and invisible to anybody tracking only the change order total.

Total implied movement across the schedule: roughly $610,000 against a fund that was sized on a percentage rather than against this list.

What to do before you sign

1. Require the allowance schedule as a separate exhibit, not as lines buried in the schedule of values.
2. Require a stated basis for every item: product, quantity, specification section or drawing reference.
3. Check each basis against the current drawing issue and flag every item carried against superseded design.
4. Write a decision date, a price fixing date and a reporting date against every item.
5. Establish in writing which fund absorbs an overage, because the answer is usually owner contingency.
6. Price the three largest allowances independently against their stated basis before signature.
7. Require reconciliation to be reported as each item closes, with the variance against the carried figure.

Item seven is the cheapest of the seven and the one that changes the most. Once the running variance is visible, the remaining schedule can be forecast rather than hoped about, and that forecast is usually the largest single component of a project remaining exposure.

Item three is the one most often skipped and the one that produces the most findings. Drawings move between the date a price is assembled and the date it is issued, and an allowance carried against a superseded specification is not a placeholder any more. It is a number priced for a building that is no longer being built. Checking nineteen items against the current issue is an afternoon of work and it regularly accounts for half the movement in a whole schedule. The scope options for that reading are in the review packages.

What we do

We read the allowance schedule against the drawings and the specification it was priced from, put a realistic landing range on every item, and rank the list by what it is worth if it lands badly. Items carried against superseded design are called out separately, because those are the ones with the widest range and the clearest argument attached. The reading is part of the cost and change exposure assessment.

Questions people ask