Allowance reconciliation: how and when it should happen
Reconciliation is the moment an allowance stops being a promise and becomes a cost. The owner has made a selection, the contractor has bought the scope, and now the stated allowance is compared to the actual figure. The difference becomes a change order, and the GMP moves. It sounds mechanical. In practice it is where allowance disputes begin, usually because nobody agreed the mechanics in advance.
The sequence in most contracts
First, the owner makes the selection the allowance was waiting for. Second, the contractor prices that selection, usually by obtaining a subcontract or purchase order. Third, the contractor presents the actual cost against the allowance, with backup. Fourth, the parties agree the variance. Fifth, a change order adjusts the GMP by that variance, up or down, with whatever markup the contract applies.
Under most AIA A133 based agreements the adjustment is for the actual cost of the allowance scope. What counts as actual cost is the usual point of friction. Does it include the subcontractor's overhead and profit? Does it include the contractor's general conditions time spent on the selection? Does it include sales tax, delivery, or installation if the allowance was for material only? Check your contract, and check the allowance description in the GMP exhibit, before the first reconciliation rather than during it.
When it should happen
The answer is: as soon as the actual cost is known, not at closeout. Some contractors prefer to reconcile all allowances together at the end, when the net is known. That is convenient for them and poor for the owner, because it delays the information. An allowance that reconciles $100,000 over in month six is a fact the owner can plan for. The same fact delivered in month twenty is a surprise.
The practical rule is that reconciliation follows award. When the contractor executes the subcontract or purchase order for allowance scope, the actual cost exists and the reconciliation can be prepared. Ask for it within the same pay application cycle. If the contract specifies a period, hold to it.
Partial reconciliation
Some allowances cover scope bought in pieces, such as furniture delivered in phases or signage released by building. Each piece can be reconciled as it is bought, with the allowance reduced by the portion consumed. The owner's record should show the original allowance, the reconciled portions, and the remaining unreconciled balance. That running balance is what belongs in the anticipated final cost.
What the owner should check in the backup
Three things. That the scope bought matches the scope the allowance described, so that the owner is not paying an allowance variance for work that was carried elsewhere in the GMP. That the quantities match the drawings or the selection the owner made. And that the markup applied is the markup the contract allows for allowance adjustments, which may differ from the markup on ordinary change orders.
A fictional example: a $600,000 tile allowance on a $40 million hotel reconciles at $780,000. The backup shows the subcontract includes floor preparation that the GMP carried in the concrete package. Remove that, and the variance drops by $60,000. The owner who reads the backup finds it. The owner who signs the change order does not.
Recording the result
Once reconciled, the allowance register entry should carry the stated value, the reconciled value, the date, the change order number that adjusted the GMP, and the markup applied. The allowance is closed. Its variance flows into the anticipated final cost as a known figure instead of a range, and the savings pool projection adjusts accordingly.
Costwitness links each reconciliation to the change order that carries it and closes the allowance in the register, so the owner's ledger and the GMP adjustment always agree. The software checks that the numbers tie. Whether the backup supports them is the owner's read.
What to do this month
- Read the allowance clause and the allowance descriptions in the GMP exhibit, and note what each allowance includes and what markup applies on adjustment.
- Ask the contractor which allowances have been bought but not yet reconciled, and request the reconciliation in the next pay application cycle.
- For any reconciliation presented, compare the bought scope to the allowance scope before approving the change order.
Questions on this
Does every allowance reconciliation need a change order?
Under most GMP agreements, yes, because the allowance adjustment changes the GMP. Some contracts allow a single closeout change order that nets all allowance variances. Even then, the owner should record each reconciliation as it happens so the closeout change order can be checked line by line.
What if the owner never makes the selection?
Then the contractor cannot buy the scope and the allowance stays open. Most contracts set a decision date for each allowance and treat a late selection as owner caused delay, with cost consequences. Missing an allowance deadline is one of the more avoidable ways an owner adds cost to a project.
Can an allowance reconcile under?
Yes, and it should be recorded with the same care. An allowance that reconciles under reduces the GMP by change order, and that reduction flows into the anticipated final cost and eventually into the savings reconciliation. Owners sometimes forget to claim reductions. Keeping the register current prevents that.
In the product
Allowance register, Change order register, Anticipated final cost. Free tool: Allowance Confidence Band, Change Order Exposure.
Keep reading
Earlier: Allowance decision deadlines and what a missed one costs. Later: An allowance is a promise to find out later. All articles on buyout and shared savings.
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