Allowance or contingency: which fund a surprise should draw from

The tile arrives and costs more than the number in the GMP. That sentence describes three different events, depending on what the number was. If the tile was an allowance, the overrun is reconciled against the allowance. If the tile was a priced line and the price went up, that is a buyout shortfall against contractor contingency. If the owner picked a more expensive tile, that is an owner change. The invoice looks the same in all three cases. The ledger entry does not, and neither does the closeout.

Owners lose this distinction more often than any other, because the contractor's pay application does not preserve it. It shows a cost against a line. Which fund carries the difference is a decision, and it gets made by whoever is keeping the record.

What each fund is for

An allowance is a named placeholder for scope that was not priced when the GMP was set. It has a value, and the contract says what happens when the real cost differs: usually the difference adjusts the GMP up or down by change order, which means the owner carries it. An allowance overrun is not a surprise in the contractual sense. It is the allowance doing what allowances do.

Contractor contingency is for the contractor's risks inside priced scope: an estimate that was low, a package bought high, a coordination problem. It is drawn without moving the GMP. Owner contingency, outside the GMP, is for owner risks: scope the owner adds, conditions nobody could have priced, design gaps the contract puts on the owner. It is drawn by change order, and the GMP moves.

The decision tree

Take a fictional $22 million charter school. The flooring line in the GMP was $410,000, of which $150,000 was an allowance for the gymnasium floor and the rest was priced. The gymnasium floor is bought for $195,000. The corridor flooring, priced, is bought for $290,000 against $260,000 carried.

The gymnasium overrun of $45,000 is an allowance reconciliation: the allowance was $150,000, the cost is $195,000, and the contract says the GMP adjusts by $45,000. The owner pays, and the owner knew that was possible on the day the allowance was set. The corridor overrun of $30,000 is a buyout shortfall on priced scope. It draws contractor contingency and the GMP does not move. If the corridor overrun happened because the owner changed the specification from sheet vinyl to rubber, it is an owner change, and the owner pays by change order.

When the contractor argues for the allowance

A contractor with a thin contingency will sometimes propose charging a priced-scope overrun to a nearby allowance, on the ground that the scopes overlap. Sometimes they do. The check is the GMP breakdown and the allowance's definition in the amendment: what exactly did the $150,000 cover? If the definition says gymnasium floor system including base and finish, the corridor is not in it, and the overrun is a contractor risk however close the two trades are.

Recording it so it stays decided

Each of the three outcomes is a different ledger entry. The allowance reconciliation is an entry on the allowance register with the final cost and a change order reference for the adjustment. The buyout shortfall is a draw on the contractor's contingency with the package reference and the cause. The owner change is a change order with an owner scope cause and a draw on the owner's fund.

What the three have in common is that the entry names the fund and the reason. A ledger that records the $45,000 as an overrun with no fund has deferred the decision to closeout, when the savings pool is being split and everyone has a reason to remember it differently.

The closeout that depends on it

At closeout, unspent contractor contingency usually goes into the savings pool and is shared. Unspent owner contingency is the owner's. Allowance adjustments have already moved the GMP. An overrun booked to the wrong fund during the job moves money between those three outcomes at the end, and it moves it silently. The owner who kept the distinction on every entry gets the closeout the contract describes. The one who did not gets the one the contractor's records describe.

In the product

Allowance register, Contingency ledger, Buyout tracker. Free tool: Contingency Runway.

Keep reading

Earlier: Change order pricing review: what the owner checks before the cause is settled. Later: Owner ledger and contractor cost report: reconciling the two once a month. All articles on buyout and shared savings.