An allowance is a promise to find out later
Somewhere in the schedule of values there is a line that says Flooring Allowance, or Signage Allowance, or Kitchen Equipment Allowance, with a round number next to it. The number looks like any other. It is not. An allowance is the contractor saying: we do not know what this will cost yet, so here is a figure to hold the place until we do.
That is a fair thing to do when the design is incomplete. It is also a risk that sits with the owner more often than with the contractor. Understanding why is the start of managing allowances well.
What an allowance is and is not
An allowance is a stated sum included in the GMP for a defined scope whose cost cannot be fixed at signing. The classic example is finishes the owner has not selected. The contractor carries a number, the owner selects the material later, and the actual cost replaces the allowance by adjustment.
An allowance is not contingency. Contingency is a reserve for unknowns across the whole job, drawn as needed. An allowance is tied to a specific scope and is expected to be replaced by a real cost. An allowance is also not an estimate in the ordinary sense. An estimate is the contractor's price for defined scope. An allowance is a placeholder for scope that is not yet defined enough to price.
Why the variance usually lands on the owner
Under most AIA A133 based agreements, when the actual cost of allowance scope differs from the allowance, the GMP is adjusted by change order to match. If the cost is higher, the GMP goes up and the owner pays more. If it is lower, the GMP goes down. The contractor is not at risk on an allowance the way it is at risk on a priced line. Check your contract, because some agreements treat allowances differently or cap the adjustment.
This makes an allowance the opposite of a guaranteed price. It is the part of the GMP that is expressly not guaranteed. An owner who reads the GMP total as the ceiling on what they will pay should subtract the allowance total and read that smaller figure as the real guarantee.
A fictional illustration
On a fictional $26 million branch library, the GMP carries four allowances: casework at $400,000, exterior signage at $80,000, audiovisual at $350,000 and landscaping at $220,000. Together they are just over a million dollars, or about 4 percent of the GMP. If each reconciles 20 percent over, which is not unusual for scope set at early design, the owner pays about $210,000 more than the GMP. No contingency is touched. No change order is disputed. The GMP simply did not cover that scope in the first place.
What makes an allowance wide or narrow
The width of an allowance, meaning how far the actual cost can plausibly land from the stated figure, depends on how well defined the scope was when the number was set. An allowance for a known product from a known vendor at a known quantity is narrow. An allowance for audiovisual on a building whose rooms have not been laid out is wide. Ask the contractor what each allowance was based on, and record the answer.
It also depends on what the allowance includes. Some allowances cover material only, with labor and installation in the priced lines. Others cover everything. A material only allowance reconciles against a purchase order. A full scope allowance reconciles against a subcontract. The difference matters when the owner is deciding whether a reconciliation figure is reasonable.
Keeping each allowance as an open item
The owner's record for each allowance needs the stated value, the scope it covers, the basis it was set on, the date by which the owner must make the selection, and the reconciled value once known. Until reconciliation, the allowance is an open item with an expected range, and it belongs in the anticipated final cost as a range, not as the stated figure.
Costwitness keeps an allowance register with those fields and carries each open allowance into the anticipated final cost with a band rather than a single number. The software tracks the open item. The owner decides the selection, which is the only thing that closes it.
What to do this month
- List every allowance in the GMP with its value and scope, and total them so you know how much of the price is not guaranteed.
- Ask the contractor what each allowance was based on and whether it covers material only or full scope.
- Find the decision date for each allowance in the schedule and put it on the owner's calendar.
Questions on this
Who sets the allowance amount?
The contractor proposes it, usually based on the design information available and its own experience. The owner can push back at GMP negotiation if an allowance seems low, because a low allowance makes the GMP look smaller than the likely cost. The time to question an allowance is before signing, not at reconciliation.
Does the contractor earn fee on allowance overruns?
Under many agreements the change order that adjusts the GMP for an allowance variance carries fee and sometimes general conditions. Check your contract. If fee applies, an allowance overrun costs the owner more than the bare difference.
Can an allowance be converted into a priced line?
Yes, once the scope is defined well enough to bid. Some owners ask the contractor to price allowance scope as soon as the design allows, rather than waiting for the original reconciliation date, because an earlier price narrows the range sooner.
In the product
Allowance register, Anticipated final cost, GMP baseline. Free tool: Allowance Confidence Band, Pre-GMP Readiness Score.
Keep reading
Earlier: Allowance reconciliation: how and when it should happen. Later: Buyout coverage at GMP: how much of the price is a subcontract, not an estimate. All articles on buyout and shared savings.
See the savings pool on a project like yours.
Thirty minutes on a call. Buyout package by package, the allowance register, and the projected pool on your split terms.