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Comparing Contingencies and Allowances in Construction

Comparing Contingencies and Allowances in Construction

As anyone involved in the construction industry is well aware, risk and possible changes to projects are a common part of this entire realm. It's important for entities to stay on top of this potential and be ready for challenges that may come up, and two approaches that are often used here, and which have both important similarities and important differences, are contingencies and allowances.

At Redi, we're here to offer a comprehensive range of industrial construction services to clients in Wyoming, Nevada, Colorado and nearby areas. We'll walk you through important concepts like these if you're unaware of them, ensuring that your approach is versatile and you're able to adjust to changes on the fly. Let's compare contingencies and allowances in the industrial construction world, plus look at the purposes of each and how to consider them.

Basic Definitions and Purposes

First and foremost, let's look at the basic definitions and purposes of contingencies and allowances. Contingencies are funds and approaches allocated to possible changes that are unknown in scope in advance - that is, that could not have been reasonably predicted or planned at the start of a project. These often involve covering risks and adjusting to changes that may happen during the duration of the project, and are typically part of cost estimating processes so that budgeting can be more accurate in an environment full of variables.

Allowances, by contrast, are funds set aside for known changes that have been anticipated in advance. These funds are then allocated and used for changes that have already been anticipated, so that their scope is known in advance and can be planned and budgeted for with reasonable accuracy.

Examples of Each

Some common examples of issues that tend to fall under the realm of contingencies include:

  • Unpredictable weather: Rain, snowfall, desert dust storms and other natural events can delay or disrupt a project in unimaginable ways. This is why contingencies are set aside for such events, so that they can be managed without causing further financial disruption.
  • Cost overruns: Unexpected costs associated with a project can arise out of nowhere and cause considerable budgeting issues if not addressed properly. Contingencies are often used to cover these as well.
  • Site condition issues: Unexpected site conditions such as the presence of hazardous materials, underground obstructions and other surprises can require additional funds to be put into a project.

On the other hand, common examples of anticipated changes that fall under the realm of allowances include:

  • Changes requested by the client: Clients may request certain changes to be made during the duration of a project, so allowances are often set aside to cover these changes.
  • Costs associated with labor: Labor costs can be more accurately estimated in advance and so allowances are often used to cover them.
  • Upgrades or replacements: If a certain component of the project needs to be upgraded or replaced due to new regulations or unexpected deterioration, then an allowance is typically used to cover the costs of these changes.

Calculation Methods

Both of these approaches can be calculated in a few different ways. Some prefer to use what's known as a "probabilistic" approach, where the scope of a project is determined in advance and then funds are allocated based on the probability of certain events happening or not. This can be useful for situations where a lot of risk is involved but where it's impossible to predict exactly when or how any given event may happen.

The other common approach for both contingencies and allowances is what's known as a "parametric" approach. In this method, funds are allocated based on fixed parameters and the amounts that have been pre-determined in advance. This can be useful for issues like labor costs or changes requested by clients, where the scope of the event is known in advance and so can be planned for with more accuracy than something that's completely unpredictable.

Having Both is Often Ideal

In the majority of cases, it's typically ideal to have both contingencies and allowances in place, as this provides the most comprehensive approach to dealing with risks and changes that may arise during a project. With funds allocated for both known and unknown issues, entities can stay on top of any challenges that may come up without having to make too many costly adjustments along the way.

This can help ensure that budgets remain on track and that projects can be completed on schedule with minimal disruption, which is the ultimate goal of all involved. It's important to note, however, that these funds should always be managed carefully and diligently so that they are used only when absolutely necessary. This way, entities can stay ahead of any potential issues while still making sure that resources are allotted in the most efficient way.

For more here, or to learn about any of our industrial construction services for Wyoming, Nevada or Colorado clients, speak to our team at Redi today.

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