The Use of Allowances and Unit Costs in Project Budgets

Dollarsign

During the preliminary design phase, many elements of a project are not defined sufficiently.  It is still necessary to include monies in the preliminary project budget for these items. It is a good practice to use allowances and unit costs as “placeholders” in a budget until the item(s) can be adequately defined.

Allowances

Allowances may be used when an owner wants a scope of work; such as the build out of a tenant space or a landscape package, to be included in a bid or estimate but the scope is undefined. Allowances may be incorporated into guaranteed maximum price contracts as well as lump sum contracts. It has been our experience that the owner, project manager, architect/engineer and/or contractor collaboratively agree on the items and value of the allowance that would be included in estimates. In a bid situation this is important so all bidders include the same value when the item or items are undefined. This will create consistency across all bids on the items included as allowances.  If the final cost of the allowance is exceeded, then the owner will be required to pay the additional net cost difference. If the final cost is less than the allowance included in the contract, then the contractor should be required to reduce the contract value by the net reduced value.

Unit Costs

Unit costs may be used for different building system categories such as earthwork, building exterior enclosure (building skin) as well as for specific items such as fire/smoke dampers or electrical fixtures. We have recommended requesting unit costs for items in the bid form when there is a lack of definition in the scope of a craft trade or item and/or a likelihood that the amount of work or number of specific items will increase (or decrease). Unit costs are generally used for specific items that can vary in quantity, area or length such as the number of items (ex: electrical receptacles), cubic yards of fill or lineal feet of pipe. Unit costs can also apply to labor rates.

Unit costs may be incorporated into guaranteed maximum price contracts as well as lump sum contracts. Unit costs are important to use where the owner has greater exposure to change due to a lack of scope definition in the project.

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