Randolph E. Ruff and Jonathan M. Mraunac | National Law Review | May 24, 2017<\/p>\n
While both relatively simple concepts, allowances and contingencies are often confused with one another. Conflating the two can lead to pitfalls. An easy way to remind oneself of the difference is: allowances are for\u00a0known<\/em>\u00a0unknowns, and contingencies are for\u00a0unknown<\/em>\u00a0unknowns.<\/p>\n An allowance is an amount established in the contract documents for inclusion in the contract sum to cover the cost of prescribed items not specified in detail.\u00a0 Variations between such amounts and the finally determined cost of the prescribed items will be reflected in change orders appropriately adjusting the contract sum.\u00a0 Contractors may want to keep the following points in mind when allocating and drafting allowances:<\/p>\n A contingency is an amount added to an estimate to allow for items, conditions, or events for which the state, occurrence, and\/or effect are uncertain and that, in the contractor\u2019s experience, will likely result in additional costs.\u00a0 There are two general types of contingencies: (1)\u00a0owner reserve (an amount set aside for additions to the project\u2019s scope or owner\u2019s risk items); and (2)\u00a0contractor contingency (an amount built into the contractor\u2019s anticipated price for the project to account for various risk factors that cannot otherwise be accounted for in a schedule of values). A contractor contingency is used because there is a degree of statistical certainty that unpredictable individual costs will arise; accordingly, the amount of the contingency is set at a level that balances the desire to have liquidity with the need to control risk. Contractors may want to keep the following points in mind when formulating contingencies:<\/p>\nAllowances<\/strong><\/h3>\n
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Contingencies<\/strong><\/h3>\n
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