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 wont 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 clients 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 didnt 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 contractors company

The new representative for the contractor submits the claim anyways

And the contract administrator isnt 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 doesnt 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