all about construction cash allowances v1.2
DESCRIPTION
A presentation on Construction Cash Allowances as typically implemented by the CCDC (Canadian Construction Documents Committee)TRANSCRIPT
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All about Construction Cash Allowances
Version 1.2
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By Peter Vander Klippe
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What is a Construction Cash Allowance?
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Cash Allowances are funds set aside for work that will be detailed later
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Why should you care?
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Why care #1: Cash Allowances are part of most CCDC* contracts
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*CCDC = Canadian Construction Documents
Committee
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*Almost every construction contract in Canada is based on a
CCDC contract
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Why care #2: They allow you to tender sooner
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Example: A retail project that was part of a larger
program
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The client was bundling the refrigeration
installation
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(So that they could get the best price)
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But they needed to get started on the
construction ASAP
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So they included a refrigeration installation
Cash Allowance
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The amount was estimated based upon
previous costs
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After they received the pricing on the
refrigeration installation bundles
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The work was assigned to the contractor
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With no additional mark up for overhead or profit*
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*this won’t work if your estimate is too low
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Work started on site sooner then if we had to wait for the final price
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Why care #3: They provide flexibility
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You can use Cash Allowances to be more
flexible
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This works best for scope near the end of the
project
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Like landscaping, furniture, and security.
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You can defer some decisions to later in the
process
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So if a deal is found on used furniture you can sod instead of seed the
lawn
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Or if you decide to use keys instead of swipe cards you can afford a
patio
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Or if you exceed your budget you can use some
of the Cash Allowance
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No patio or Sod
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Staying within your
budget
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Things to watch out for when using Cash
Allowances
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Watch out for multiple specific Cash Allowances
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This can limit your flexibility and run against
approval thresholds
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Example:
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You have three Cash Allowances
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$10,000 for security
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$50,000 for landscaping
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And $140,000 for refrigeration installation
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For a total of $200,000
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Contract is awarded, contractor starts work
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And it turns out that it is going to take a lot more
security work
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To connect this system to the client’s other buildings requires
upgrading the existing system
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The new security estimate is $25,000
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But, thankfully concurrent to this,
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The pricing came in for the refrigeration
installation
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And the layout was revised, reducing the
number of cases
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Which reduced the refrigeration installation
to $125,000
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So now we have:
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$25,000 for security
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The same $50,000 for landscaping
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And $125,000 for refrigeration installation
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For a grand total of $200,000
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BUT
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When you tell your contractor about this
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He demands $2,250 extra in overhead and profit
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He says that managing a security company is a lot
more work
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So he included a 20% markup in his bid for the security Cash Allowance
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And only a 5% markup for the refrigeration installation Cash
Allowance
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So because we are shifting $15,000 from 5% to 20% markup, he wants
his cut
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And to make it worse
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Your client lets you know that as the security costs
has risen by 150%
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He needs his CEO to sign off on the change
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This could all be avoided
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Make sure it is clear that there is only one Cash
Allowance
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Watch out for hidden Cash Allowances
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It can get complicated if Cash Allowances are not
clearly identified
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Example
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The mechanical sub-consultant ran out of time
prior to tender
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And instead of designing the reverse osmosis
system
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A drawing note was included that instructed the contractor to carry a $15,000 Cash Allowance
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Possible outcome #1: Waste of funds
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2 bids are disqualified as they didn’t include this
Cash Allowance
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One of these bids that was $45,000 lower then the awarded contractor
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Possible outcome #2: Contractor claim
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The contractor awarded the job missed this Cash Allowance in his estimate
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(This often happens as missing something lowers
your price)
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So when the Supplemental Instruction is issued for the reverse
osmosis system
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The contractor submits a claim for the work at
$17,345 + 10% markup
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Possible outcome #3: Double dipping
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The contractor technically did include the cash
allowance in his price
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But do to staffing changes at the
contractor’s company
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The new representative for the contractor submits
the claim anyways
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And the contract administrator isn’t aware
of this Cash Allowance
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So the claim is approved
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The contractor also invoices for 100% of his
base work
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And as the contractors invoice doesn’t itemize
the Cash Allowance
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He is paid for both the Cash Allowance and the
draw
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Which gives the contractor $30,000 for $15,000 worth of work
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Summary
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Cash Allowances can be extremely useful*
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*if used correctly