Allowances and contingencies are common elements in construction bids, but they're often misunderstood or misused. Knowing when and how to include these items can help you submit competitive bids that appropriately account for uncertainty. This guide explains the differences and best practices for handling each.
Understanding the Difference
Allowances
Allowances are specific dollar amounts included in a bid for items that aren't fully defined:
Characteristics:
- Owner-defined or industry-standard amounts
- Cover specific identified items
- Spent on actual costs (plus markup)
- Adjusted at end of project
Common uses:
- Finish selections not yet made
- Concealed conditions
- Testing and inspection
- Permits and fees
Contingencies
Contingencies are funds to cover unforeseen circumstances:
Characteristics:
- Risk-based amounts
- Cover unexpected costs
- May or may not be used
- Contractor's pricing decision
Types:
- Estimating contingency (your uncertainty)
- Design contingency (incomplete documents)
- Construction contingency (execution unknowns)
- Owner contingency (scope changes)
Types of Allowances
Cash Allowances
Money set aside for future spending:
Format:
Allowance for finish hardware: $25,000
(Owner to select specific hardware;
actual cost plus 15% will be charged)
How they work:
- Amount included in base bid
- Spent against actual purchases
- Difference credited or charged
- Markup typically specified
Specification Allowances
Required by spec for specific items:
Common spec allowances:
- Light fixture allowance
- Floor covering allowance
- Cabinet allowance
- Appliance allowance
- Landscaping allowance
Bidding approach:
- Include spec amount exactly
- Note in bid if amount seems low
- Clarify markup percentage
- Track carefully during construction
Unit Price Allowances
When quantities are uncertain:
Format:
Allowance for rock excavation:
100 CY @ $85/CY = $8,500
(Actual quantities measured and paid)
Application:
- Estimated quantity × unit price
- Adjusted based on actual
- Protects both parties
- Common for concealed conditions
Owner-Specified Allowances
When Owners Include Allowances
Owners may specify allowances when:
- Selections not yet made
- Conditions unknown
- Design incomplete
- Future decisions pending
Bidding with Owner Allowances
Your responsibility:
- Include exact amount specified
- Add your markup as allowed
- Note if amount seems inadequate
- Don't adjust the base amount
Example language:
The following owner-specified allowances
are included in our base bid:
Light fixtures: $50,000
Finish hardware: $25,000
Landscaping: $75,000
Per specification, our bid includes 15%
fee on actual allowance expenditures.
Challenging Inadequate Allowances
If you believe an allowance is too low:
- Note concern in bid
- Submit RFI during bidding
- State assumption if no response
- Don't change the specified amount
Contingencies in Bidding
When to Include Contingency
Consider contingency for:
- Incomplete documents
- Unusual site conditions
- Complex coordination
- Uncertain scope elements
- First-time project types
How Much Contingency
Guidelines by risk level:
| Risk Level | Design Complete | Design 50% | Design Concept | |------------|-----------------|------------|----------------| | Low risk | 0-2% | 3-5% | 8-10% | | Medium risk | 2-4% | 5-8% | 10-15% | | High risk | 4-6% | 8-12% | 15-20% |
Factors increasing contingency:
- New project type for you
- Aggressive schedule
- Complex specifications
- Difficult site conditions
- Unknown owner/client
Contingency Strategies
Explicit contingency:
- Line item in estimate
- Visible in breakdown
- Clear about uncertainty
Buried contingency:
- Included in line items
- Higher unit prices
- Less visible
Trade-offs:
- Explicit is more transparent
- Buried may appear more competitive
- Owner perception matters
- Be consistent with approach
Competitive Considerations
Impact on Bid Price
Allowances:
- Same for all bidders (if specified)
- Don't affect competitive position
- Markup may vary slightly
- Level playing field
Contingencies:
- Vary by bidder
- Directly affect competitiveness
- Risk tolerance differs
- Can win or lose on this
Risk vs. Reward
Too much contingency:
- Higher bid price
- May lose competitively
- Protects against loss
- Conservative approach
Too little contingency:
- Lower bid price
- More competitive
- Higher profit risk
- Aggressive approach
Finding the Balance
Consider:
- Your risk tolerance
- Competition level
- Confidence in estimate
- Project risk factors
- Relationship value
Document Conditions Affecting Contingency
Complete Documents
When drawings and specs are final:
- Lower contingency appropriate
- Focus on execution risks
- Fewer unknowns
- More confident pricing
Incomplete Documents
When design is not finished:
- Higher contingency needed
- More uncertainty
- Scope may change
- Price accordingly
Design-Build
When you're responsible for design:
- Include design contingency
- Account for development
- Budget for refinement
- More control of risk
Managing Allowances and Contingencies
During Bidding
Track carefully:
- Log all allowances
- Note contingency decisions
- Document assumptions
- Keep backup records
After Award
Allowance management:
- Track spending against amounts
- Get approvals before exceeding
- Document all expenditures
- Reconcile at project end
Contingency management:
- Monitor actual vs. estimated
- Address issues early
- Document any claims
- Protect your margin
Change Order Implications
When allowances are exceeded:
- Process change order for overage
- Include appropriate markup
- Get advance approval if possible
- Document thoroughly
When contingency is needed:
- Evaluate if covered
- Process change order if not
- Maintain good documentation
- Communicate proactively
Communication Best Practices
In Your Bid
Be clear about:
- Allowances included (with amounts)
- How markup will be applied
- Assumptions made
- Items excluded
Example bid language:
ALLOWANCES INCLUDED:
1. Testing & Inspection: $15,000
2. Permit Fees: $8,500
3. Utility Connections: $12,000
These allowances will be adjusted to
actual costs plus 10% contractor fee.
With the Owner
During negotiations:
- Explain contingency rationale
- Discuss risk sharing
- Clarify allowance administration
- Align expectations
With Your Team
Internally:
- Document contingency locations
- Track allowance spending
- Monitor actual costs
- Report variances
Common Mistakes
Allowance Errors
Avoid:
- Changing specified amounts
- Forgetting to include markup
- Missing specified allowances
- Poor tracking during construction
Contingency Errors
Avoid:
- No contingency on risky projects
- Excessive contingency on competitive bids
- Inconsistent application
- Not adjusting for conditions
Communication Failures
Avoid:
- Unclear bid language
- Unstated assumptions
- Poor documentation
- Surprise overages
Industry Standards
Typical Allowance Items
Commonly handled as allowances:
- Finish hardware
- Light fixtures
- Specialty finishes
- Landscaping
- Kitchen equipment
- Owner-furnished items
Typical Contingency Ranges
Industry norms:
- General construction: 3-5%
- Renovation work: 5-10%
- Historical preservation: 10-15%
- Hazardous materials: 10-20%
Adjustments for:
- Document completeness
- Site conditions
- Owner type
- Market conditions
Conclusion
Allowances and contingencies are essential tools for managing uncertainty in construction bidding. Used properly, they:
- Account for undefined items
- Protect against unforeseen costs
- Enable competitive pricing
- Allocate risk appropriately
Understanding when and how to use these elements helps you submit bids that are both competitive and appropriately protect your interests. Be clear in your bid documents about what's included, maintain good documentation, and manage these items carefully throughout the project.
Remember: the goal is pricing that wins work and delivers profit. Allowances and contingencies, used wisely, help achieve both objectives by handling uncertainty in a structured, transparent way.
ConstructionBids.ai provides detailed project information to help you assess risk factors and price allowances and contingencies appropriately for each opportunity.
