Allowances, Contingencies, and Risk: Price the Unknowns Honestly
Most estimating disputes come from one issue: the parties thought an allowance meant different things. A professional estimate distinguishes clearly between allowances (known unknowns), contingency (unknown unknowns), and risk premiums (priced risk based on commercial reality).
1. Prime Cost (PC) Items
PC items are typically client selections where the supply cost is not final at contract time.
- Define whether PC includes supply only, or supply + delivery + install accessories.
- Clarify what happens if the client selects above allowance (variation process).
- Include realistic “mid-range” allowances aligned with target market.
2. Provisional Sums (PS)
PS covers work where the scope can’t be accurately defined (e.g., rock excavation, latent services diversions).
- State assumptions clearly: depth, disposal distance, dewatering, shoring, access.
- Include measurement method: dayworks dockets, quantity remeasure, or supplier invoices.
- Track PS during delivery weekly; PS blowouts are predictable if monitored early.
3. Contingency
Contingency is not “extra profit”. It is a risk pool for genuine uncertainty: incomplete documentation, coordination gaps, design development, and unknown site constraints.
- Keep contingency visible as a separate line item in internal budgets.
- Require justification to draw it down (variation-like discipline).
- Reduce contingency as design certainty increases.
4. Risk Premiums (Commercial Reality)
Risk premiums price identifiable commercial risks: price volatility, difficult access, liquidated damages exposure, or high defect risk scope.
- Document risks and mitigation assumptions in tender clarifications.
- Don’t hide risk premiums inside random trade rates—keep traceability.
5. The Estimator’s Golden Rule
If you can’t explain it, you can’t defend it. Allowances must be transparent, realistic, and aligned to the contract mechanism that adjusts them.