Cost Allowances in Detail and Conceptual Cost Estimates
Let’s look at what allowances are and how they are used in a cost estimate prepared for construction contracts vs. allowances used in conceptual cost estimating. We will see that they can be very different.
Firstly, let’s define the term “allowance” in the context of cost estimating. An allowance is a lump sum added to the cost estimate to account for costs that are certain to occur but cannot be identified with any accuracy.
A good example is unknown site conditions. If not enough site investigation data is available, the engineers will propose an allowance to account for changes in the design once relevant data becomes available from future investigations. Another example is special furnishings required by the project owner but not yet decided.
An allowance can also be added when the costs are known with acceptable accuracy, and a detailed cost estimate is not required. A good example is the waste allowance that is added to the material cost in a form of a percentage.
In cost estimating, we will find two relevant types of allowances:
- Design allowances
- Quantity/Price allowances
We will look at allowances from a cost estimating for contractors’ perspective first:
- The architect/engineer specifies the design allowances. These allowances include all costs: material, labour, equipment, indirect costs, overhead and profit. The cost estimator’s role is to include them in the cost estimate as specified.
- Quantity/Price allowances. During the development of a cost estimate, the cost estimator will assess if cost allowances are required to be included. Whenever a cost is identified as required but cannot be determined, an allowance should be included in the cost estimate. The reasons why some costs cannot be determined can vary: no reliable data source available, not enough time to perform a detailed cost estimate, production rates not validated, construction methodology and schedule not certain, etc. The point here is that any scope of work that is covered by an allowance represents a risk to the contractor. It is advisable to keep allowances to a minimum to reduce the risk of project overruns.
The conceptual cost estimating and allowance allocation is somehow different.
Design allowances.
The design accuracy will vary through the various design phases, from lower in the concept phase to higher in the detail design phase. The design engineers will allocate design allowances to each design phase to compensate for the design accuracy. The cost estimator should communicate with the design engineers to properly understand what allowances should be included in each phase. It is not unusual for design engineers to include design allowances in the form of design factors, which is not transparent to the cost estimator’s eye. A good understanding of the design allowances included in the cost estimate is very important to establishing the cost estimate accuracy.
Quantity/Price allowances.
The quantity take-off for the conceptual cost estimate strongly correlates to the design level The lower the design definition, the lower the accuracy of the quantity take-off. The cost estimator should communicate with the design engineers to properly identify all areas of the design where costs are required but cannot be quantified. A blanket quantity take-off allowance is usually used for each discipline. Other costs that cannot be quantified but identified as required are costs related to the project execution, from freight and warehousing to schedule and overtime, construction aids, site indirect costs and contractor’s profit.
Allowances are used to increase the accuracy of the cost estimate. It is worth mentioning that, by definition, an allowance is based on unknown measurements. This is why the cost estimator should use caution and not become too optimistic when assessing the cost estimate accuracy based on the use of allowances.
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