PURPOSE
The purpose of this procedure is to provide an overview of allowance orders and the process for their initiation, processing, and finalization. Allowance orders are a mechanism to authorize the use of all or a portion of a Fixed Cash Allowance included in the bid documents to cover various types of anticipated, hard to specify, or unknown conditions that could or will occur during the construction of a project (see Master Specifications General Requirements Section 01212). Allowance Orders can either be negotiated as a lump sum amount or on a time and materials basis. The amount of a specified Fixed Cash Allowance can only be used for the purpose specified and cannot be transferred to another allowance with a shortfall of funds. If the total amount of a Fixed Cash Allowance is exceeded, a change order must be initiated to accomplish the expected work and cover the shortage of funds (see Procedure 20.2).
REFERENCES
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RESPONSIBILITIES
Project Manager (PM): The PM is responsible for monitoring both the use and scope of allowance orders and their impact on the project’s budget and schedule. The PM must also agree with the scope of an allowance order and approve its utilization.
Construction Manager (CM): It is the CM’s responsibility to ensure that allowance orders are initiated, processed, and finalized in a timely, efficient, and proper manner. The CM is responsible for identifying and defining the required scope, obtaining a cost estimate and preliminary schedule analysis for the allowance utilization, and completing and distributing the Allowance Order Initiation Form (Attachment 20.5-1). The CM must also track the utilization of the specified allowances to see that the pre-set allowance amounts are not exceeded.
Project Engineer (PE): The PE may be involved in determining whether or not a change is required and producing the revised contract drawings and/or specifications for the Allowance Order.
Estimator: The estimator supporting the Construction Management Team is responsible for preparing an independent cost estimate for the allowance utilization, reviewing the Contractor’s cost quotation, and assisting the CM in preparing for Allowance Order negotiations.
Scheduler: The scheduler supporting the Construction Management Team is responsible for conducting a preliminary schedule analysis for the proposed allowance utilization, reviewing the Contractor’s Time Impact Analysis, and providing the CM with the proper recommendation regarding the possible schedule impact.
PROCEDURE
Five types of working documents for allowance orders are used by the Bureau of Engineering to define the scope of a required allowance utilization: Preliminary Allowance Orders (PAO), Emergency Allowance Orders (EAOs), Time and Materials Allowance Orders (T&M AOs), final Allowance Orders (AOs), and Unilateral Allowance Orders (UAOs). Following is a brief description of each of these documents:
Preliminary Allowance Order (PAO): A PAO is used to request from the Contractor, a cost quotation and Time Impact Analysis for review and negotiation of a fixed price prior to the Contractor starting the utilization of all or a portion of a Fixed Cash Allowance bid item.
Time and Materials Allowance Order (T&M AO): When the scope of the allowance utilization is not easily defined, a T&M AO, with a specific not-to-exceed price limit, is used to authorize the Contractor to perform the work while documenting daily labor, material, and equipment costs.
Emergency Allowance Order (EAO): In order to avoid delays to the project, and when the scope of the allowance work is easily defined, an EAO, with a specific not-to-exceed price limit, is used to direct the Contractor to start work prior to negotiating the lump-sum cost. The amount of the EAO may be up to the full amount of the Fixed Cash Allowance and does not require Board authorization.
Allowance Order (AO): When the cost and time impacts of work to be paid from a Fixed Cash Allowance are jointly agreed upon, the CM should issue an AO to document the agreed upon scope and cost. If the work required by the AO is found to have an impact on the construction schedule, a Change Order (CO) must be written to document the schedule adjustment and legally amend the construction contract. It is important to note that an AO authorizes the expenditure of monies from a Fixed Cash Allowance, but does not amend the construction contract – this can only be done through the issuance of a CO. The amount of the AO may be up to the full amount of the Fixed Cash Allowance and does not require Board authorization.
Unilateral Allowance Order (UAO): If the cost and time impacts of an AO cannot be successfully negotiated and the work of the PAO, EAO or T&M AO is necessary, the CM may issue a UAO for the Contractor to proceed with the work for the scope, cost, and schedule adjustment that the City deems to be fair and reasonable. If the work required by the UAO is found to have an impact on the construction schedule, a Unilateral Change Order (UCO) must also be written to document the schedule adjustment and legally amend the construction contract. The amount of the AO may be up to the full amount of the Fixed Cash Allowance and does not require Board authorization.
Canceled Allowance Order: The City may elect not to proceed with the work proposed in a PAO if the cost and time impacts cannot be successfully negotiated and the proposed work is elective. In this case, the CM must notify the Contractor in writing to cancel the PAO. The CM needs to also notify the PM and BCA Inspector of the canceled allowance order.
Types of Allowances
Allowances fall into sixteen (16) categories. Refer to Master Specifications General Requirements Section 01212 for a detailed explanation of each possible category.
Allowance Order Initiation
The CM initiates the use of the Fixed Cash Allowance when the specific designated need for the allowance occurs. The first step in the allowance order initiation process is to complete the Allowance Order Initiation (AOI) form and identify the reason for the allowance order. After identifying the specific reason for the allowance work, the CM must clearly define the scope of the work and obtain from the PE any necessary drawing and/or specification revisions, or other material to document the requested work.
Next, the CM must review the cost of the proposed work by either preparing or delegating the preparation of an initial cost estimate that fully accounts for all costs dictated by the scope of the allowance utilization. The CM should also determine if the proposed work has the potential to impact the project’s schedule. All available documentation, including associated RFIs, sketches, and revised plan and specification sheets, should be attached to the AOI form to provide a clear understanding of the proposed work. The PM and Senior Engineer/Division Manager should approve the work by signing the AOI form. Because the Form is an in-house document, the original should be retained in the project file with copies distributed to the Estimator, Scheduler, PM, and PE, who use the completed information to monitor and track the impact on the project’s fixed cash allowance budget as determined by the contract documents and the project’s schedule. For projects using BOE’s electronic construction management system (e2020), the CM attaches and/or links the supporting documentation to the built-in AOI form and distributes the AOI form using e2020.
Issuing the Allowance Order
Once the AOI form has been approved, the CM prepares and issues the Preliminary Allowance Order (PAO) and supporting documentation to the Contractor. After issuance of the PAO, and within the time specified in the cover letter, the Contractor must prepare and submit a lump-sum cost estimate and schedule adjustment request, if any, for the proposed allowance order work. The Contractor must submit a detailed estimate since greater detail will enable the CM and/or Estimator to identify any inconsistencies, errors, or unreasonable costs.
Upon receiving the Contractor’s cost proposal and schedule analysis, the CM reviews the documentation to determine whether the full scope of the allowance work was understood and incorporated into the Contractor’s proposal. At this time, the Estimator and Scheduler supporting the Construction Management Team should have completed their independent analysis of the cost and budget impact. The Estimator and Scheduler should compare their findings with the Contractor’s proposal to identify any discrepancies and inform the CM.
After collecting and reviewing this information, the CM is ready to proceed with negotiating the allowance order with the Contractor, if necessary. The object of the negotiation is to agree on a reasonable price that is acceptable to both the City and the Contractor. Contractors are entitled to adequate compensation for any additional work; and, the City is obligated to pay a fair amount and, when required, to allow a reasonable time extension for that work.
The following items represent a guideline for negotiating an allowance order and reaching an agreement with the Contractor:
Review and agree upon the scope of the allowance work, including material quantities.
Review and agree upon material costs.
Review and agree upon required equipment and equipment costs.
Review and agree upon required labor hours and associated labor rates.
Review and agree upon any schedule impacts.
Arrive at a final agreement of the lump-sum cost and required time adjustment, if any.
A record of the cost and schedule aspects of the negotiations must be maintained by the CM and summarized on the Allowance Order Record of Negotiations (AORON) form (Attachment 20.5-8), and shall describe how the agreed-upon price and any required time extension were reached. Upon successful completion of the negotiations, the CM may proceed with finalizing the allowance order. In the case of unsuccessful negotiations, all proposed but disputed costs and/or time extensions should be documented using the AORON. The CM should then issue a Unilateral Allowance Order (UAO), or a T&M Allowance Order (T&M AO), for the Contractor to proceed with performing the required work.
Finalizing the Allowance Order
After completing negotiations for an allowance order, the CM must finalize the allowance order either by issuing an AO, Final T&M AO) except that the space allocated for the allowance amount is completed with the negotiated price. The AO should be accompanied by required supporting documentation, such as related drawing and specification revisions, invoices, schedule analyses, RFI’s, and other documents necessary to fully describe the allowance work and its cost and/or time impacts. In addition, the CM should include (attach/link) the AOI, PAO, Contractor’s and CM’s independent estimate, AORON, and applicable correspondence in the AO file.
The CM and PM must sign the AO, obtain the signature of the Contractor, before their Senior Engineer or Division Manager sign the AO. After the AO has been fully executed, a copy of the final AO is distributed to the Contractor, PM, Inspector, Owner Representative, and others, as required, using BOE’s CM software system (e2020).
Final Time & Materials Allowance Order (Final T&M AO)
The Final T&M AO (Attachment 20.5-6) is used in cases where the amount of work or time involved cannot be defined and when the required work is easy to monitor and distinguish from the contract work. The Final T&M AO is issued with a final price based on the Contractor’s actual labor, material, and/or equipment utilized to perform the allowance work as verified by the Bureau of Contract Administration Inspector. Final T&M AOs are processed in the same manner as T&M Change Orders with the exception being the final cost of the Allowance Order is deducted from the Fixed Cash Allowance that was a part of the original bid price.
If a situation occurs where the pre-fixed allowance amount is exceeded, the additional funding needed must be processed as a Change Order and is subject to all Change Order rules and conditions (see Procedures 20.2, 20.3, and 20.4).
Unilateral Allowance Order (UAO)
If allowance order negotiations have failed and the required work is either necessary for successful completion of the project goals, or has already been initiated by the Contractor, the CM should issue a UAO, for additional information see Attachment 20.5-2. However, UAOs may lead to disputes at project closeout and should only be used as a last resort to continue the progress of work. Although issuing a UAO directs the Contractor to proceed or continue with the specified allowance work in exchange for the cost and time adjustments stipulated by the City, the Contractor has a legal right to dispute the time and cost adjustments set forth in the UAO.
The UAO may be issued as either a lump-sum or a T&M allowance order. Its body is typically identical to that issued for the previous allowance order document (i.e., the PAO, EAO or T&M contract by deductive change orders or by deducting the allowance items in the Final Closeout Change Order. For further information, see Procedure 20.4 - Finalizing Change Orders.
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