You are designing a renovation to an airport departures terminal, and a constant problem in the design process has been the excessive amount of time required to obtain approvals and finalize details from the many stakeholders in the project (including airport authorities, security agencies, airlines and many others). You are behind schedule, the tender deadline is nearing and the design for the ticketing counters is still in progress. It doesn’t look like you are going to obtain review and approval to proceed in time to make the deadline. What do you do? Postpone the tender? This is a case where a cash allowance may come to your rescue.
A cash allowance is defined in the CCDC stipulated price contract as follows:
“Where precise details of certain portions of the work are unknown at the time of calling bids, the bidders may be required to include a cash allowance in the bid price.”
A common example of where a cash allowance is seen would be in the case of a power connection to a building. Often Public utilities will only provide estimates at the start of a project and the final costs are only known once the work is complete. Therefore a cash allowance would ensure that the costs of hookup are covered within the bid contract amount. Other examples of items that can be covered by cash allowances could be testing and inspection, sculptures, murals, landscaping, site furnishings, special hardware, special equipment, owner purchased products, and of course specialty mill-work.
Sometimes a cash allowance is confused with a contingency allowance. The key difference between the two is that a cash allowance covers the known, whereas the contingency allowance covers the unknown costs in a project, just like a rainy day fund. A contingency allowance is defined as
“A fixed amount to cover increases in costs for changes in the work that the contractor cannot be expected to know in advance and are not defined.”
Keep in mind that the cash allowance is still only an estimate, and once the actual cost of the work is known the contract price must be adjusted by a separate change order that records the difference between the cash allowance and the actual amount payable. This can result in either a credit or increase to the final construction cost.
Even though a cash allowance seems pretty straightforward, great confusion can result unless the scope or work and costs included are clearly defined and listed in the contract specifications, usually Section 012100. For example, a cash allowance wouldn’t normally include the contractor’s overhead and profit, however it could include:
- Actual cost of Materials
- Applicable taxes, except GST
- Delivery to site
- Handling on site
- Labour and all other costs related to installation
- Where applicable, all subcontractor’s and sub-subcontractor’s overhead and profit related to the cash allowance
So as with all things in construction nothing is black and white, and you have to be very careful with the grey! I wonder if Antonio Gaudi ever thought about using cash allowances to speed up the design and construction of his Sagrada Familia Basilica in Barcelona, check out this neat you tube video showing the final design. Construction started 131 years ago!
References we used in researching this post included:
- CCDC 20 – A guide to the use of CCDC 2 – 2008 Stipulated price contract
- The Construction Specifications Institute: Construction Contract Administration Practise Guide
- AIA – The Architect’s Handbook of Professional Practice – 14th Ed