Allowances In Construction Contracts
Avoiding Misunderstandings and Disputes
O'Leary, FAIA, MRIAI
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Purpose of Allowances
The establishment of cash allowances in construction contracts is a convenient method of allocating construction funds to portions of the work that cannot be specified with sufficient particularity for competitive bidding at the time of contracting. This includes primarily items that have not yet been selected pending the availability of new models or the arrival of updated catalogs. In some cases the owner has not as yet established definite criteria for certain equipment or furnishings, but this should not preclude proceeding with general construction. It also includes items of superficial or decorative nature that will be selected at a later time when colors, textures, furniture, and interior designs are more definitely established.
The types of purchases most frequently encountered as cash allowances are those such as finish hardware, lighting fixtures, special equipment, graphics, building signage, floor coverings, window treatment, and wall coverings. It is a flexible way of including in the contract items that are not yet designed, chosen, or specified. Allowances are practical for work of indefinite scope or where the quality, configuration, and other specific characteristics have not as yet been determined.
Contract Provisions for Allowances
Disputes between owners and contractors can easily develop over the issues of accounting and billing for cash allowances and related expenses. Therefore it is important that the construction contract covers all aspects which could be maladministered or misunderstood. Those contracts that include the AIA General Conditions (Note 1) will have the decided advantage of a practical set of conditions. Paragraph 3.8, Allowances, of A201, is based on the principle that the designated cash allowance is to be used only for the net purchase price of the denominated item. Any adjunct or related costs to be incurred by the contractor should be anticipated and included in the contract sum. (Note 2)
During construction, the owner must further instruct the contractor how each cash allowance item is to be expended. The contractor will need to know, with specificity, what is to be purchased and from which sources it is available. This may require additional drawings, specifications, or description lists to be prepared by the architect. These additional instructions should be forwarded in writing to the contractor to avoid misunderstanding and possible error.
It is the owner's duty, without prodding by the contractor, to make all allowance selections in time to meet the contractor's previously issued progress schedule. This means that purchasing lead time, delivery time, and all other related time factors must be taken into consideration. If the owner's untimely or inartful selection causes any construction schedule slippage, the delay is chargeable, on a day for day basis, to the owner.
The owner's further direction to the contractor, usually prepared by the architect, should include all necessary information which will be needed for purchasing, including manufacturers' names, model numbers, colors, textures, sizes, capacities, and electrical and mechanical characteristics. If the owner desires the purchase to be made from a particular source, that should be stated. However, the contractor is not required to deal with any persons or entities to which reasonable objection has been lodged. (Note 3)
Logically, the burden of locating purchasing sources of exotic or hard to locate items remains with the owner, although this is not mentioned in Paragraph 3.8 of A201.
Contractor's Purchase Cost and Related Costs
In its fiduciary capacity to the owner, the contractor is obligated to use its best efforts, skill, and purchasing power to obtain the most favorable price, terms, and other conditions of purchase. Obviously, it is fraudulent and unethical for a contractor to solicit or accept any unreported secret commissions or kickbacks from vendors. All price reductions due to rebates, refunds, and discounts should be applied for and obtained by the contractor and credited to the owner. Allowances are to be priced at the net cost to the contractor including all sales taxes and delivery to the site. (Note 4)
All of the contractor's costs relating to cash allowance items, other than the actual purchase, should be included in the contract sum, not in the allowance. (Note 5) These adjunct costs include handling, unloading, uncrating, cleaning, and secure storage. Also included are the contractor's installation labor, administration, supervision, interest, insurance, bonds, overhead, and profit. Related costs also include all required permits, inspections, certifications, and testing.
Cash allowances that are to be carried by subcontractors should be accounted for in similar manner.
The Contractor is responsible for losses due to damage to allowance items while under its care, such as while stored or during installation.
Should re-stocking charges be incurred, they are chargeable to the owner or contractor depending on who caused the expense.
Specifying Cash Allowances
In addition to the requirements for administration of allowances in Paragraph 3.8 of the AIA General Conditions, a schedule of cash allowances should be included in Division 1 of the project specifications. A reference to each cash allowance item should be made in the applicable trade sections to clarify specifications and installation standards.
The cash allowance procedures described in Paragraph 3.8 of A201 and in this article are the orthodox commonly accepted practices in the administration of construction contracts by architects using the AIA standard contract documents. Should the owner or contractor wish to deviate from these customary practices for any reason, it is a simple matter to effect appropriate amendments to the contract. Any desired amendments to the AIA General Conditions should be included in the supplementary general conditions.
Final Reconciliation of Cash Allowances
When the actual purchase costs of allowance items are known, the differences from the specified amounts should be adjusted by means of a change order. If the net purchase cost (including shipping and taxes as specified in Clause 220.127.116.11 of A201) exceeds the allowance, the excess is to be charged to the owner by an additive change order or, when it is less, by a deductive change order.
There should be no change in the contractor's related costs unless the owner or architect had changed the specification or quantity of the allowance item in a way that would affect those costs, up or down. In that event it would also be appropriate to adjust the contractor's overhead and profit accordingly. If such a change affects the time of performance through no fault of the contractor, the contract time should also be adjusted in the change order.
1. General Conditions of the Contract for Construction, AIA Document A201-2007.
2. Paragraph 3.8, Allowances, of A201: 3.8.1 The Contractor shall include in the Contract Sum all allowances stated in the Contract Documents. Items covered by allowances shall be supplied for such amounts and by such persons or entities as the Owner may direct, but the Contractor shall not be required to employ persons or entities against which the Contractor makes reasonable objection.
3.8.2 Unless otherwise provided in the Contract Documents:
.1 allowances shall cover the cost to the Contractor of materials and equipment delivered at the site and all required taxes, less applicable trade discounts;
.2 Contractor's costs for unloading and handling at the site, labor, installation costs, overhead, profit and other expenses contemplated for stated allowance amounts shall be included in the Contract Sum and not in the allowances;
.3 whenever costs are more than or less than allowances, the Contract Sum shall be adjusted accordingly by Change Order. The amount of the Change Order shall reflect (1) the difference between actual costs and the allowances under Section 18.104.22.168 and (2) changes in Contractor's costs under Section 22.214.171.124.
3.8.3 Materials and equipment under an allowance shall be selected by the Owner with reasonable promptness.
3. Subparagraph 3.8.1 of A201.
4. Section 126.96.36.199 of A201.
5. Section 188.8.131.52 of A201.
Guide to Successful Construction: Effective Contract Administration” by Arthur
F. O’Leary, FAIA, MRIAI or “Construction Nightmare Jobs From Hell & How
To Avoid Them” by Arthur F. O’Leary and James Acret are available from bookworkz.com
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