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All about Construction Cash Allowances Version 1.2

All About Construction Cash Allowances v1.2

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A presentation on Construction Cash Allowances as typically implemented by the CCDC (Canadian Construction Documents Committee)

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Page 1: All About Construction Cash Allowances v1.2

All about Construction Cash Allowances

Version 1.2

Page 2: All About Construction Cash Allowances v1.2

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