Living With Uncertainty: Allowances, Cost Contingency, and Dispute Resolution

By Roger Nelson, PE, PSP; Steve Purugganan; and Adam Troscinski
Spire Consulting Group, LLC

In the complex world of construction, uncertainty is inevitable. Whether it’s unforeseen site conditions, design clarifications, or procurement delays, every project is subject to events that can drive up costs and increase risk. To address this uncertainty, contracts commonly include contingency and allowance provisions. These tools, when used effectively, can help keep projects on track. But when mismanaged or misunderstood, they often become the source of costly disputes.

This article explores how contingency and allowance funds function in construction contracts, outlines best practices for managing them, and highlights lessons learned from real-world disputes.

Understanding Contingency vs. Allowances

While often used interchangeably, contingency and allowances serve different purposes.

• Contingency refers to funds set aside to cover unknowns, such as unforeseen events that could increase project costs.
• Allowances are used for known but not fully defined scopes of work. These are expected items, but their final cost or quantity has not yet been finalized.

For example, a contract may include a $100,000 contingency to address unpredictable issues, along with a $50,000 allowance for landscaping where the design and scope will be finalized later.

This distinction is important during project execution and also plays a critical role in resolving disputes related to ownership, control, and the intended use of these funds.

When Contingency Leads to Conflict

Despite being a standard feature in many contracts, contingency can become a source of disputes. These disagreements usually center on two questions:

1. Who controls the contingency funds? Is the contractor free to use them at their discretion, or does the owner need to approve each use?
2. What qualifies for use of contingency? Are costs related to rework or coordination issues covered? What about minor scope adjustments or clarifications?

Even when contracts address these issues, vague language or inconsistent enforcement can lead to differing interpretations, which creates risk for both parties.

Best Practices for Managing Contingency

To reduce disputes and manage risk, the following practices are recommended:

• Clearly define ownership and use in the contract. Agreements should identify who controls contingency funds, how they may be used, and what procedures are required for approval or documentation.
• Align contingency with the stage of project development. Early-phase estimates should include higher contingency levels due to greater uncertainty, while more developed designs require less. AACE’s cost estimate classification system provides guidance on appropriate levels.
• Maintain accurate and detailed records. Contractors should track every draw from contingency, including the amount, reason, and supporting documentation.
• Comply with notice requirements. Most contracts require formal notice when contingency or allowance funds are used. Missing these deadlines can jeopardize otherwise valid claims.

When Mismanagement Leads to Disputes: Two Case Examples

1. American Property Construction Co. v. Sprenger Lang Foundation

In this case, a contractor sought reimbursement for work it believed was covered by contingency. The dispute arose because the contract did not clearly define how contingency could be used. The owner assumed prior notice and justification were required, while the contractor believed it had the right to use funds as needed.

The court found that, although both parties understood the purpose of contingency, they had failed to agree on a clear process. This disagreement might have been avoided with a formal agreement outlining when and how contingency could be used.

2. Decker Electric v. Pratt Regional Medical Center

In a second example, contingency funds were exhausted on mechanical equipment changes before foundations were poured. Notably, neither the architect nor the contractor notified the owner of the early depletion of contingency funds.

When additional changes arose during construction later in the project, there were no funds left to cover them. The owner refused to pay for costs associated with additional work, arguing that contingency should have covered those costs.

This miscommunication and lack of transparency ultimately led to a legal dispute. The case illustrates the importance of clearly defined oversight, careful tracking, and regular communication when managing contingency.

Real-World Case Study: How Forensic Analysis Clarified a Dispute

On a commercial office project in Texas, a guaranteed maximum price (GMP) contract included both contingency and allowances. The contract did not outline how to use or reconcile these funds, but the parties agreed to use the change order request process to track their use.

As the project progressed, disputes arose over delays, unresolved contract balances, and disagreements about contingency and allowance accounting. The contractor claimed it had properly used contingency for items like subcontractor rework and had submitted allowance reconciliations with credits to the owner. The owner rejected the claims, alleging poor performance and incorrect accounting.

A forensic analyst reviewed the change orders, cost records, and supporting documentation. The analysis confirmed that:

• The contractor had notified the owner within the required timeframe; 
• Contingency funds had been used for unforeseen rework that was consistent with prior owner approvals; and
• The contractor’s allowance reconciliations were accurate and supported by contemporaneous records.

Although the owner disagreed with the claims, it did not offer evidence to support its position. The independent analysis helped validate the contractor’s claims and resolve the dispute.

Conclusion: Build Certainty Into Your Risk Strategy

Contingency and allowances are essential tools for managing risk and uncertainty in construction. However, without clear contract language, defined procedures, and strong documentation, these tools can quickly become sources of conflict.

To ensure project success, owners and contractors should align early on how these funds will be managed. This includes who controls them, what they may be used for, and how their usage will be documented and approved.

By taking a proactive approach and maintaining transparency throughout the project, teams can turn these provisions from a potential risk into a key component of a successful project strategy.

To explore the full analysis, legal case references, and detailed project case study, download the original white paper:
“Living With Uncertainty: Allowances, Cost Contingency, and Dispute Resolution”
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