All about Construction Cash Allowances
Version 1.2
By Peter Vander Klippe
What is a Construction Cash Allowance?
Cash Allowances are funds set aside for work that will be detailed later
Why should you care?
Why care #1: Cash Allowances are part of most CCDC* contracts
*CCDC = Canadian Construction Documents
Committee
*Almost every construction contract in Canada is based on a
CCDC contract
Why care #2: They allow you to tender sooner
Example: A retail project that was part of a larger
program
The client was bundling the refrigeration
installation
(So that they could get the best price)
But they needed to get started on the
construction ASAP
So they included a refrigeration installation
Cash Allowance
The amount was estimated based upon
previous costs
After they received the pricing on the
refrigeration installation bundles
The work was assigned to the contractor
With no additional mark up for overhead or profit*
*this won’t work if your estimate is too low
Work started on site sooner then if we had to wait for the final price
Why care #3: They provide flexibility
You can use Cash Allowances to be more
flexible
This works best for scope near the end of the
project
Like landscaping, furniture, and security.
You can defer some decisions to later in the
process
So if a deal is found on used furniture you can sod instead of seed the
lawn
Or if you decide to use keys instead of swipe cards you can afford a
patio
Or if you exceed your budget you can use some
of the Cash Allowance
No patio or Sod
Staying within your
budget
Things to watch out for when using Cash
Allowances
Watch out for multiple specific Cash Allowances
This can limit your flexibility and run against
approval thresholds
Example:
You have three Cash Allowances
$10,000 for security
$50,000 for landscaping
And $140,000 for refrigeration installation
For a total of $200,000
Contract is awarded, contractor starts work
And it turns out that it is going to take a lot more
security work
To connect this system to the client’s other buildings requires
upgrading the existing system
The new security estimate is $25,000
But, thankfully concurrent to this,
The pricing came in for the refrigeration
installation
And the layout was revised, reducing the
number of cases
Which reduced the refrigeration installation
to $125,000
So now we have:
$25,000 for security
The same $50,000 for landscaping
And $125,000 for refrigeration installation
For a grand total of $200,000
BUT
When you tell your contractor about this
He demands $2,250 extra in overhead and profit
He says that managing a security company is a lot
more work
So he included a 20% markup in his bid for the security Cash Allowance
And only a 5% markup for the refrigeration installation Cash
Allowance
So because we are shifting $15,000 from 5% to 20% markup, he wants
his cut
And to make it worse
Your client lets you know that as the security costs
has risen by 150%
He needs his CEO to sign off on the change
This could all be avoided
Make sure it is clear that there is only one Cash
Allowance
Watch out for hidden Cash Allowances
It can get complicated if Cash Allowances are not
clearly identified
Example
The mechanical sub-consultant ran out of time
prior to tender
And instead of designing the reverse osmosis
system
A drawing note was included that instructed the contractor to carry a $15,000 Cash Allowance
Possible outcome #1: Waste of funds
2 bids are disqualified as they didn’t include this
Cash Allowance
One of these bids that was $45,000 lower then the awarded contractor
Possible outcome #2: Contractor claim
The contractor awarded the job missed this Cash Allowance in his estimate
(This often happens as missing something lowers
your price)
So when the Supplemental Instruction is issued for the reverse
osmosis system
The contractor submits a claim for the work at
$17,345 + 10% markup
Possible outcome #3: Double dipping
The contractor technically did include the cash
allowance in his price
But do to staffing changes at the
contractor’s company
The new representative for the contractor submits
the claim anyways
And the contract administrator isn’t aware
of this Cash Allowance
So the claim is approved
The contractor also invoices for 100% of his
base work
And as the contractors invoice doesn’t itemize
the Cash Allowance
He is paid for both the Cash Allowance and the
draw
Which gives the contractor $30,000 for $15,000 worth of work
Summary
Cash Allowances can be extremely useful*
*if used correctly