Why an allowance set at 50 percent design carries a wider band than one set at 90

Two projects each carry a $500,000 millwork allowance. On the first, the GMP was set at 50 percent construction documents, and the millwork is a sketch and a square footage. On the second, the GMP was set at 90 percent, and the millwork has elevations, sections and a finish schedule. The number is the same. The range of outcomes is not.

Owners who put the stated allowance into their anticipated final cost treat both as $500,000. A better approach is to carry each with a band, and to make the band wider when the design behind the allowance was thinner.

What an allowance is actually based on

A contractor sets an allowance from whatever design information exists at the time. At early design, that might be a program area and a unit rate from a past job. At late design, it might be a takeoff of real quantities and a budget quote from a vendor. The first is a rough estimate of an undefined thing. The second is close to a bid.

The stated allowance does not tell the owner which of these it is. That is why the basis of each allowance should be recorded at GMP signing: what drawings existed, what quantities were assumed, whether any vendor pricing was obtained. From the basis, the owner can form a view of how wide the range is.

Why the band widens as design completeness falls

It is a recognized industry pattern that estimate accuracy improves as design detail increases. The reasons are concrete. Quantities are unknown until the drawings show them. Specifications are unknown until the architect writes them. The owner's own preferences are unknown until selections are made. Each unknown is a way for the actual cost to differ from the allowance, and early in design there are more of them.

The band also tends to be asymmetric. Allowances set early are more likely to land over than under, because scope tends to grow as it is defined and because owners, when they finally choose, often choose above the placeholder. A band of minus 10 percent to plus 30 percent is a more honest picture of an early allowance than plus or minus 20. The owner should ask the contractor for its own view of the range rather than inventing one.

A fictional comparison

A fictional $60 million medical office building carries a $1.2 million imaging equipment allowance set at design development, with the equipment not yet selected. The same project carries a $300,000 door hardware allowance set against a full hardware schedule. The first could reasonably land anywhere from $1.1 million to $1.7 million. The second is unlikely to move more than $30,000 either way. An anticipated final cost that carries both at their stated value hides a half million dollar swing in the first.

Using the band in the owner's numbers

The anticipated final cost should show an allowance as a low, expected and high figure until it is reconciled. The expected figure may be the stated allowance or may be adjusted by what the owner has learned since. The low and high come from the band. Summed across all open allowances, this gives the owner a range for the allowance contribution to final cost, which is far more useful to a board than a single figure that everyone knows is provisional.

As design progresses and selections are made, the band narrows. An allowance whose scope has been fully drawn since GMP signing should have its band tightened, even before it is bought. The owner's register should allow the band to be updated, with a note on why.

Where the band sits in the record

Each allowance entry carries its stated value, its basis and design stage at signing, its current band, and its status. The band is an owner judgment informed by the contractor's view, and it should be labeled as such. It is not a measurement. It is a way of admitting what is not known yet in a form the owner can plan around.

Costwitness carries a band on each open allowance, sized from the design completeness recorded at GMP, and rolls the low and high into the anticipated final cost range. The software applies the band. The owner sets it, and revises it as the design fills in.

In the product

Allowance register, Anticipated final cost, GMP baseline. Free tool: Allowance Confidence Band, Pre-GMP Readiness Score.

Keep reading

Earlier: The shared savings clause: how it works and what it pays. Later: Allowance decision deadlines and what a missed one costs. All articles on buyout and shared savings.