Archive for May, 2014

All about Construction Cash Allowances

Update: I created a SlideShare on this same topic.

What is a Construction Cash Allowance?

A Construction Cash Allowance is a financial tool that is included in most of the standard Canadian Construction Document Committee contracts. They are a way of allocating costs to future scope items so that you can worry about the details later.

Construction Cash Allowance Example #1: Refrigeration installation

For a previous retail client we used a cash allowance for the cost to install the refrigeration. As this was part of a larger program this client had chosen to self tender the refrigeration installation in regional bundles. But the final cost wasn’t know yet. What we did was include an estimated amount for the refrigeration installation in the tender documents so that the contractor would include enough overhead and profit in their tender price.

Construction Cash Allowance Example #2: Landscaping vs. furniture vs. security

Another possibility is where you have a fixed budget but the scope of various items is not known. You could establish a Cash Allowance for Landscaping, furniture, and security and see what was available at a later date. This allows you to balance the current needs of the client vs market conditions.

Watch out for making multiple specific cash allowances:

We often run into problems when there are multiple very specific Cash Allowances. This can limit your flexibility in the future as if you try to transfer funds between them the contractor may push back or you may require additional approvals from your client.

Example of multiple specific cash allowances:

Let’s say that you decide that you need 3 different cash allowances: $10,000 for security, $50,000 for landscaping, and $140,000 for refrigeration installation giving you a total amount of $200,000. Months go by and it turns out that to integrate the security system at this building to your client’s other facilities is a much more involved task than anticipated and the current estimate is $25,000. Thankfully concurrent to this refrigeration installation tender closed significantly under budget and the client reduced the number of cases required reducing the refrigeration installation costs to $125,000, which is the same total. When you present this reallocation to your contractor he submits a claim for an extra $2,250 as his estimate included different overhead & profit markups for security (20%) vs refrigeration installation (5%). Also your client indicated that as the security costs have increased by 150% we will need to brief his CEO on the increase. A better way is to amalgamate all the cash allowances into one giant cash allowance.  You do want to give the contractors some idea of the breakdown so they know what is coming, but I would express this in a range and always treat the cash allowance like one giant pool of money.

Watch out for hidden cash allowances

The key to using cash allowances correctly is to make sure they are clearly indicated and known by all parties involved so that all the work gets done. These can lead to claims, poor value for the client, and double dipping.

Example of a hidden cash allowance

Your mechanical sub-consultant ran out of time and included a note on one of his drawings that the contractor should carry a $5,000 cash allowance for a reverse osmosis system. Most of the bidders catch this note and include an extra $5,000 in their bid.

Possible outcome #1: Contractor Claim

Unfortunately the evaluation team did not notice that the lowest “compliant” bidder didn’t include this cash allowance. A few weeks go by and the mechanical sub-consultant issues a Supplemental Instruction for the reverse osmosis system and the contractor submits a claim for $5,231 for this work.

Possible outcome #2: Waste of client funds

The lowest compliant bidder did include this cash allowance but unfortunately you had to disqualify another proponent who was $25,000 less because he omitted the $5,000 cash allowance.

Possible outcome #3: Double dipping

The mechanical sub-trade did include the cash allowance in their price, but as the contractor’s project manager has taken over and their estimator is on vacation, he submits a claim. No one knows about the note on the drawing so they agree to the claim and the contractor bills for both the full amount of the mechanical sub-trades price and the claimed amount.

Cash Allowance Recommendations

My recommendation is to use cash allowances carefully. Cash allowances can be a great tool to allow flexibility but if implemented carelessly they can cause you a lot of grief.