Part of the Ontario construction contracts guide for owners.
Cash allowances look harmless in a tender. A line in the specifications says the contract price includes, say, $120,000 for light fixtures to be selected later, and every bidder carries the same number. The owner gets comparable prices and the design team gets more time. The trouble starts months later, when the fixtures are chosen, the real cost comes in at $150,000, and the owner discovers that the allowance was never a budget. It was a placeholder, and the difference is the owner's.
This guide explains how cash allowances work under CCDC 2 (2020), what they include and exclude, how they're reconciled, and why under-allowances are one of the most predictable sources of cost growth on a stipulated price contract.
What a cash allowance is
A cash allowance is a fixed sum, written into the contract documents, for work or materials that haven't been fully defined at tender. Bidders include it in their price without pricing the work themselves. When the scope is finally defined and bought, the contract price is adjusted to reflect the actual cost.
Allowances are used for items where the owner wants to decide later or where design isn't finished: finish hardware, signage, light fixtures, specialty equipment, artwork, landscaping, or inspection and testing. They let an owner tender before every decision is made.
Allowances also make bids easier to compare, since every bidder carries the same number for the same undefined item. That's a real benefit, but it cuts both ways: an allowance is the one part of the price that competition never tested. Some contracts use related devices, such as prime cost sums, and McLennan Ross cautions that these can change the character of a stipulated price agreement and leave owners responsible for significant sums beyond the fixed price. Whatever the label, read how the clause adjusts the price before accepting a tender.
A cash allowance isn't the same as a contingency allowance. In CCDC 2, a contingency allowance (GC 4.2) is a sum for unforeseen changes that includes the contractor's overhead and profit, and it's spent through the normal change order and change directive process. A cash allowance (GC 4.1) is for known items of undefined cost, and it works differently.
How CCDC 2 (2020) treats cash allowances
GC 4.1 sets out a fairly complete scheme:
- Scope comes from the contract documents. The contract price includes the cash allowances stated in the contract documents, and the work or costs each allowance covers are whatever those documents describe (GC 4.1.1).
- Overhead and profit sit outside the allowance. The contract price, not the allowances, includes the contractor's overhead and profit on the allowance work (GC 4.1.2).
- The owner authorizes spending. Expenditures under cash allowances are authorized by the owner through the Consultant (GC 4.1.3).
- Shortfalls are pooled first. If one allowance runs over, unspent amounts in other allowances are reallocated, at the Consultant's direction, to cover the shortfall, with no overhead and profit added. Only when the total actual cost of all allowances exceeds the total of all allowances is the contractor paid the excess, plus overhead and profit on that excess only, as set out in the contract documents (GC 4.1.4).
- Savings come back without markup. Any net unspent amount, after reallocation, is deducted from the contract price by change order with no adjustment for overhead and profit (GC 4.1.5).
- Progress billing. The value of allowance work performed can be included in progress payments (GC 4.1.6).
- A procurement schedule. The contractor and Consultant jointly prepare a schedule showing when allowance items must be ordered to avoid delaying the work (GC 4.1.7).
The Ontario Association of Architects notes that the 2020 edition also confirms the owner's right to obtain competitive bids for allowance items (GC 4.1.8). That's worth using.
What's included, and the grey zone
Because scope comes from the contract documents, an allowance includes only what the specification says it includes. If the allowance section says "supply of light fixtures," then delivery, unloading, installation, and lifts or other construction equipment may not be in it. The OAA's guidance is direct: if costs such as freight, installation or construction equipment aren't specified as included, they're treated as a change to the contract price, with markups.
This is where many allowance overruns start. The owner reads "$120,000 for fixtures" as the total cost of fixtures in place. The contractor reads it as supply only, and prices installation separately as a change. Both can be right, depending on a sentence in Division 01 that nobody reviewed closely.
Reconciliation: how the numbers settle
Each allowance is reconciled when the item is bought, and the overall position is settled by change order. Here's an illustrative example with three allowances and a 10% overhead and profit rate set in the contract documents:
- Door hardware: allowance $60,000, actual $72,000, over by $12,000.
- Signage: allowance $40,000, actual $31,000, under by $9,000.
- Light fixtures: allowance $120,000, actual $150,000, over by $30,000.
Under GC 4.1.4, the $9,000 unspent on signage is reallocated first. The net excess across all three allowances is $33,000. The contractor is paid that excess plus 10% overhead and profit on it, $3,300, for a total increase of $36,300 over the $220,000 carried in the contract.
View the data
| Line | Amount |
|---|---|
| Allowances in contract | $220k |
| Door hardware | +$12k |
| Signage | −$9k |
| Light fixtures | +$30k |
| O&P on net excess | +$3.3k |
| Final cost | $256.3k |
Pooling helps the owner. Before the 2020 edition, the general approach was that each overrun attracted overhead and profit, while each saving was credited without it. In the same example that would have added markup to the full $42,000 of overruns. The bigger lesson is in the total: the allowances understated the real cost by 15%.
Why under-allowances hurt owners
An allowance shifts pricing risk to the owner. The contractor isn't responsible for whether the number is right; it simply carries it. If the allowance is low, the owner pays the difference plus markup, and does so late in the project, when the contingency is already under pressure.
Courts have read allowances in that light. In ASC (AB) Facility Inc. v. Man-Shield (Alta) Construction (2018 ABQB 130, affirmed 2019 ABCA 379), the Alberta court described cash allowances as placeholders used during tendering, and held that excess costs under CCDC 2 had to be read as costs authorized by the owner and recorded in a change order. The case is Alberta's, but it turned on the standard CCDC 2 wording and shows how the scheme is meant to work: allowance spending is an owner decision, documented as a change.
On programs we've supported, the patterns behind allowance overruns are consistent:
- Allowances set to make the tender fit the budget. A low allowance makes the stipulated price look better. The real cost arrives later.
- Allowances used to hide unfinished design. Large allowances for major systems mean the owner is tendering a price that isn't really fixed.
- Stale numbers. Allowance values copied from an earlier project or an early estimate, with no escalation since.
- Late decisions. Selections made after the procurement schedule dates, leading to premium freight, substitutions or delay claims.
A good test: if allowances add up to more than a small share of the contract price, ask whether the project was ready to tender. Our guide to construction contingency covers how to hold money for what's still unknown, which is a better tool than an allowance that's known to be low.
Managing allowances during construction
Treat each allowance as a mini-procurement with its own budget, decision date and paper trail. Keep an allowance log alongside the change log: allowance amount, committed cost, actual cost, variance, the decision-maker and the change order that settles it. Report the net allowance position monthly, not just at closeout. Our guide to managing construction change orders covers the documentation, and allowance reconciliations should follow the same discipline.
Ask the contractor to show supplier quotes for every allowance purchase. Where the value justifies it, use the right to competitive bids. And reconcile as each item is bought, not in one negotiation at the end, when nobody remembers what was agreed.
What owners should do
- Define each allowance's scope in writing. State whether it covers supply only or supply, delivery and installation, and what's excluded. Get the Consultant to review the wording before tender.
- Set realistic values. Base allowances on current pricing for a defined level of quality, with escalation to the expected purchase date, not on what makes the tender fit.
- Keep allowances few and small. Use them for real late decisions, not to tender incomplete design.
- Agree the procurement schedule early. Use GC 4.1.7 to fix decision and order dates, and track them in the schedule.
- Log and report allowances monthly. Track committed and forecast cost against each allowance, and include the net position in the cost forecast.
- Reconcile by change order as you go. Settle each allowance when it's bought, with quotes attached, and confirm the overhead and profit rate in the contract documents.
The bottom line
A cash allowance is the owner's money held in the contractor's price. It buys flexibility at tender, but every dollar of shortfall comes back to the owner with markup. Owners who define allowances tightly, price them realistically and track them monthly keep that flexibility without the surprise at the end.
Want an independent review of the allowances in your tender documents or contract? Book a 30-minute call with Benjamin R. Consulting.
Sources: CCDC 2 (2020) Stipulated Price Contract, GC 4.1 and GC 4.2 (copy published with a public tender); Ontario Association of Architects, Practice Tip PT.23.11, CCDC 2 (2020) Overview of Changes (2024); Osler, Introducing CCDC 2 2020 (2021); G. White, McLennan Ross LLP, Understanding the Cost Implications of Prime Cost Sums and Cash Allowance Clauses (2023). The reconciliation example is illustrative. This article is general information, not legal advice. Get legal advice on your contract and specific circumstances.