What's the difference between allowance and contingency in a contract between owner and contractor?

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    Michael Ermann

    Let's answer your question, Chun, with another question. . . 

    An owner of a speculative office building that will lease to corporate tenants when the building’s construction is completed would like to fold the cost of some limited amount of tenant-specific office partition construction into the base cost of the project. Which of the following should be included in the bid package to account for each future tenant needing to layout out their own partitions differently to suit the tenants’ specific needs?

     

    Add alternate

    Contingency

    Fixed allowance

    Unit price

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    A: Fixed allowance

    Explanation:

    “Base cost” is the sum of a contractor’s labor and materials for completing the project. It’s another phrase for “the fixed cost to build.”

    When a bid set goes out to the prospective builders, and the builders come back with a bid price, that price is fixed, which is good for the owner because he doesn’t want to be fleeced later by contractor-generated change orders. The challenge comes when there is some aspect of the project where the owner needs flexibility to defer a decision until later. How does an owner take advantage of the low fixed price that comes with competitive fixed bidding, but maintain flexibility to address decisions later that simply can’t be decided when the project goes out to bid? Each of these options available as answer choices in this test item gives the owner some measure of flexibility to make future decisions, yet retain the power to shop for a low price now and lock in costs through the bid process.

    In this case, the owner knows that future tenants will need partitions dividing up the floorplates into offices, and he recognizes the cost savings and coordination ease of having the contractor who builds the core and shell be the same person who lays out the tenants’ partitions. But he doesn’t yet have all of his future tenants signed to leases when construction on the building’s shell and core commence! How can he get a fixed price on partitions, fixtures, and finishes needed for tenants he doesn’t yet have? One future tenant may be a call center with open plan cubicle offices, and another may be a lawyer with a need for individual offices and conference rooms (with appropriate sound isolation between rooms). An “allowance” or “fixed allowance” postpones the partition layout decisions until tenants are secured. Each tenant, when they sign their lease, will get an allowance of $16.75 per square foot to layout partitions and select hardware, fixtures, and finishes. If a tenant would like more construction than the allowance provides for, she can negotiate her own construction contract with the prime contractor, or with another commercial interiors contractor of her choosing. Win, win, win.

     

    An “add alternate” or “alternate” gives the owner (rather than a future tenant) a fixed price for adding a roof terrace to this building. At the time of bidding, he’s not certain whether he wants a roof terrace atop the office building and he’d like to get pricing for that option and secure a few more tenants’ interest and feedback before making that decision. He’ll have the architect design the roof terrace as an add alternate and each bidder can offer a fixed price for the building without the roof terrace, plus another fixed price for the cost of the roof terrace addition. The owner can consider both of those price quotes (with whatever weighting he chooses) when selecting the winning contractor.

    During construction, it comes to light that a previously-unknown fiberoptic cable runs underground through what will be the foundation of the office building. That cable will need to be re-routed around or below the foundation. A contingency, a bank account reserve for such “unknown unknowns,” gives the owner and contractor a slush fund to pay for these kinds of surprises. The cost of the work for the building will be $70M based on the contractor’s bid, and then a $5.6M contingency will be set aside by the owner for unforeseeable hiccups like the surprise fiberoptic cable.

    If fixed allowances give the owner a fixed price to account for the whims of future tenants or condo purchasers; add alternates give the owner a fixed price to account for decisions he himself would like to make later; and contingencies give the contractor and owner a slush fund for un-anticipatable snags in construction. . . “unit prices” offer a fixed price, per-quantity, for “known unknowns.” Unit prices are used when we know in advance that we don’t know how much of one particular thing we will need. In this case, perhaps the depth to competent soils for the end pilings is not clear from the soils report. The bid package will then ask for a unit price, quoted per linear foot of piling required for the building’s foundation. With that clever ask, the owner has given the contractor the flexibility to pound pilings as deep as needed, without exposing the owner to a contractor looking to make a profit with piling depth change orders on a project she bid too low in order to win. With a unit price, each bid will include a fixed cost—one the bidder is bound to—per-unit-depth of piling needed, and the contractor will be held to that price later.  

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    Rebekka O'Melia (Edited )

    An allowance in a construction bid assigns a value to an item that the owner hasn't selected yet.  So the contractor knows the client needs cabinetry, but they haven't looked at cabinet yet and selected them, and the contractor doesn't know if they'll want high-end mahogany cabinets or IKEA, a moderate value is assigned.  Client will need to pay more or get a credit based on what they select later.

    A contingency is used by the contractor for unforeseen occurrences, say 5-10% is added to the bid.

    Hope this helps!

    Rebekka O'Melia, Registered Architect, NCARB, B. Arch, M. Ed, Step UP,  Step UP ARE 5.0 Courses

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    Chun Hin Pun

    That is all clear Thanks! 

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