Cash allowances are crucial for managing project finances when specific work details are undefined during bidding. As defined in the CCDC stipulated price contract, cash allowances are placeholders in the contract sum for estimated costs of work items with unfinalized details during bid calls. These allowances ensure the project budget includes these costs, even if their exact nature is initially unclear.
What are Cash Allowances?
Cash allowances are used when the exact scope, materials, or labour requirements for certain project aspects aren’t fully determined during bidding. This could be due to various reasons like:
- Awaiting design decisions
- Obtaining permits
- Finalizing material selections
By incorporating cash allowances, contractors can estimate these items in their bids, ensuring the project’s financial plan accounts for them.
Key Considerations
- Clear Identification and Description: Contract documents should explicitly identify cash allowances, typically within the Schedule of Values, with a detailed description of the work covered by each allowance to minimize ambiguity and potential disputes.
- Initial Value: The initial value of a cash allowance represents the estimated cost based on available information at bidding time, subject to adjustment once the actual cost is determined.
- Documentation: Maintaining supporting documentation like supplier quotes, estimates, and communication records substantiates the basis for the cash allowance and any subsequent changes.
- Change Orders: When the actual cost of work covered by a cash allowance is finalized, a change order is typically issued to adjust the contract price, reflecting the difference between the initial allowance and the actual cost, resulting in either an addition or deduction from the contract sum.
Cash Allowances vs. Contingency Allowances
- Cash allowances address known but undefined costs.
- Contingency allowances are allocated for unforeseen costs due to unexpected circumstances during the project, acting as a buffer to absorb the financial impact of these unforeseen events.
Examples of Cash Allowances
Cash allowances can apply to various construction elements:
- Power Connections: Costs of connecting a building to the power grid may be unknown at bidding, depending on factors like utility company requirements and site conditions.
- Specialty Millwork: Custom millwork, like cabinetry or built-in furniture, might require detailed design and material selection before determining the final cost.
- Landscaping: Specific plants, materials, and labour for landscaping might depend on final design decisions and site conditions.
- Artwork and Sculptures: If a project includes artwork or sculptures, the final cost might be unknown until the artist or sculptor is selected and the work is commissioned.
RForm Contract Administration Software
Software solutions like RForm Contract Administration streamline managing cash allowances throughout the project lifecycle. RForm offers features such as:
- Clear Identification and Tracking: RForm allows clear labelling and tracking of cash allowances within the project’s budget.
- Documentation: The software facilitates attaching supporting documents to each cash allowance.
- Change Order Generation: RForm simplifies creating change orders to adjust the contract price based on the actual cost of the work.
- Reporting and Analysis: The software provides reporting and analysis tools to track cash allowances’ financial impact and identify variances between estimated and actual costs.
Benefits of Using Cash Allowances
Cash allowances offer several benefits in construction contract administration:
- Accurate Bidding: They enable contractors to submit more accurate bids, even with undefined project details.
- Budget Control: They help manage the project budget by accounting for anticipated costs.
- Flexibility: They provide flexibility to accommodate design changes or unforeseen circumstances.
- Transparency: They promote transparency by clearly identifying and tracking estimated costs.
Challenges and Risks
While cash allowances offer advantages, they also present challenges and risks:
- Underestimation: Underestimated initial allowances can lead to cost overruns and disputes.
- Overestimation: Overestimated allowances can tie up project funds unnecessarily.
- Scope Creep: If the scope of work covered by a cash allowance isn’t clearly defined, it can lead to scope creep and additional costs.
- Disputes: Disputes can arise if the actual cost significantly exceeds the initial allowance or if there are disagreements regarding the scope of work covered.
Best Practices
To manage cash allowances effectively and mitigate potential risks, consider the following best practices:
- Detailed Scoping: Clearly define the scope of work covered by each cash allowance in the contract documents.
- Accurate Estimation: Use historical data, market research, and expert input to estimate the initial allowance accurately.
- Regular Monitoring: Track actual costs against the allowance throughout the project and promptly address variances.
- Timely Change Orders: Issue change orders promptly to adjust the contract price based on the actual cost.
- Effective Communication: Maintain open communication among project stakeholders regarding the status and changes to cash allowances.
Conclusion
Cash allowances are valuable in construction contract administration, providing flexibility and budget control while managing undefined costs. By understanding the purpose, considerations, benefits, and risks associated with cash allowances, construction professionals can effectively utilize them to ensure project success. Software solutions like RForm further streamline cash allowance management, improving accuracy, transparency, and communication throughout the project lifecycle.
References:
Changes and Cash Allowances: https://rform.ca/feature/proposed-change-orders-change-orders-and-change-directives/
Quick guide to cash allowances: https://rform.ca/quick-guide-to-cash-allowances/
