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An overrun lands where its cause and the contract’s price basis send it

Top Query

The draw request is sitting with the lender, the variance line is the first thing the partner circled, and inside that one number are three overruns that belong to three different parties. A tile picked above its allowance. A condition nobody could see until the wall came open. A line the estimate simply missed. The report adds them together. The contract pulls them apart, and it does that by reading two things side by side: what caused each cost, and what the agreement says the price was.

One variance line, three overruns, three owners

“It went over” does not fund a draw. The draw inspector compares the request to the schedule of values in the loan file, and a schedule of values only changes when somebody changes it. The partner asks a blunter question: whose money is this? Both of them need the variance broken out by cause before the number means anything.

So we sort every overrun on two axes. The first is its cause, which tells you what kind of contract event it is. The second is the price basis, fixed price, cost-plus or cost-plus under a guaranteed maximum, which tells you who was holding that kind of risk when the contract was signed. Read either axis alone and you will assign some of those lines to the wrong party.

Sorting by cause

An owner-directed change is the clean one. The owner asked for different work: a moved wall, a second fixture, a finish the drawings never showed. The contract sum and the contract time adjust through a change order, and the owner funds it. What it triggers downstream is the part people skip. The change order has to be signed before the work, it has to enter the schedule of values before anyone can draw on it, and if it lands on the critical path it spends float the rest of the job was counting on.

An allowance variance looks just as simple and is not, which is why it gets its own section below.

A concealed or differing condition runs through its own clause, and the test for what qualifies, the notice and the documentation of buried work are laid out in our piece on concealed conditions. One fact belongs here because a variance report depends on it. Under AIA A201-2017 §3.7.4, the contractor gives notice of a concealed or unknown condition before disturbing it and no later than 14 days after first observing it. That is the AIA window. Other contracts write their own, and a residential form may write none at all, which is worse, not better, because then nobody agreed on when the right to adjust expires.

An estimating or buyout miss is ours. If the scope was observable at the walkthrough, or sat on the drawings we priced, and our number did not carry it, a fixed price means we absorb the difference. The same goes for a subcontractor who comes in above the figure we carried for that trade. Owners sometimes get these presented as change orders with a discovery story attached. The question that sorts them is whether a competent estimator reading the same documents would have priced it.

Material price movement between bid and buyout is a contractor risk under a fixed price, unless the contract carries an escalation clause. If it does, the clause decides everything: what triggers it, what documentation proves the movement, whether there is a ceiling, and whether it runs both directions. If it does not, a supplier’s new price list is the contractor’s problem, whatever the market did.

Design gaps are where allocation gets contested. The price was built from a set of drawings. Plan review comes back asking for a fire-rated assembly, more structure at an opening, a detail the drawings never showed, and now the permitted work is larger than the priced work. Who pays turns on who supplied the design. An owner who hired the architect and handed the contractor a set to price stands in a different place from an owner who bought design and construction together under one contract. The agreement’s allocation of design responsibility governs, and counsel is the one to read it. We will tell you which clause matters. We will not tell you how a court would read it.

Code-required work surfacing at inspection splits the same way. If the drawings showed it and the field built it wrong, the correction belongs to the contractor. If the inspector requires something neither the drawings nor the scope ever described, it goes back to the design-responsibility question above. The correction notice does not tell you which of the two you are looking at. Somebody has to hold it against the approved drawings.

Quick Answer

Who pays when a construction project goes over budget?

The cause of the overrun and the contract’s price basis decide it together. Owner-directed changes and allowance overages land on the owner. Estimating misses and scope that was visible at bid land on the contractor under a fixed price. Concealed conditions move the price and the time only through the contract’s own clause, and only when notice went in on time.

The mistake we see in variance reports is a single column. An owner who reads every overrun as the contractor’s fault loses credibility on the ones that are the contractor’s fault, because the report mixes them with costs the owner chose.

The reverse is just as common. A contractor who files an estimating gap as a concealed condition is betting nobody will compare it to the walkthrough notes. Write the category on each line, with the clause it runs under, and the argument shrinks to the lines where the category is in dispute.

What an allowance actually buys under AIA A201-2017

This is the least understood clause on most jobs, and it decides more money than it looks like it should.

Under AIA A201-2017 §3.8.2, an allowance covers the cost to the contractor of the materials and equipment delivered at the site, plus required taxes, less trade discounts. That is all it covers. The contractor’s costs for unloading and handling at the site, labor, installation, overhead and profit on the allowance items sit inside the Contract Sum, not inside the allowance. Then §3.8.2.3 adjusts the Contract Sum by change order for the difference between the actual cost and the allowance.

Follow that through a selection. The owner picks a tile above the allowance. The delivered-cost difference is the owner’s, and it arrives as a change order. The contractor’s labor to set tile was already priced into the Contract Sum, so it does not move.

Now the owner picks a heavier stone, or a large-format porcelain panel, or a fixture that needs blocking the wall was never going to get. The installation changes: a different substrate, a different setting method, more hands to move it, a slower production rate. Under that structure the extra labor is not an allowance variance at all, because labor was never in the allowance. It is a change in the work, and it gets priced as one, with its own effect on time. An owner who approves the selection thinking the allowance math covers it is approving a second change order nobody has written yet.

Many residential contracts are not AIA forms. Some define an allowance as material only, some as an installed allowance with labor bundled in, and some never define it at all. Before anyone argues about a selection, read which definition your contract uses. Whether the allowance described a grade in the first place is a separate problem, and the piece on low bids covers it.

Finished interior of a South Florida residence with installed finish selections — Selections are where allowance variances start. How the contract defined the allowance decides whether installation labor moved along with the material.Home Remodeling →

Quick Answer

Does an allowance overage include the extra labor to install a more expensive selection?

Under AIA A201-2017, no. The allowance covers the delivered cost of the material plus required taxes, less trade discounts. Handling, labor, installation, overhead and profit sit in the Contract Sum. If a selection changes the installation itself, that is a change in the work and gets priced as one. Contracts written outside AIA may define the allowance differently.

That makes the selection meeting a pricing event. When a pick changes weight, format or substrate, we price the installation change alongside the material difference, so the owner approves both at once instead of meeting the labor a week later.

On a lender-funded job it matters twice, because the material delta and the labor change can land on different lines of the schedule of values, and the inspector will look for each where it belongs.

The price basis decides who was holding each risk

Under a fixed price, or lump sum, the contractor holds its own estimating, buyout and productivity risk, and material price movement too unless an escalation clause says otherwise. The owner holds changes, allowance variances and whatever the concealed-condition clause moves back across. That split is what the owner paid for inside the number.

Under cost-plus, the owner pays the actual cost of the work plus a fee, so nearly every category of overrun flows to the owner, the estimating miss included, because there was no fixed estimate to miss. What stays with the contractor is whatever the contract’s definition of reimbursable cost leaves out, which often includes fixing its own defective work. On a cost-plus job, that definition is the real risk allocation. Read it before you read anything else.

A guaranteed maximum price is cost-plus with a ceiling. Inside the ceiling, the contractor usually carries a contingency of its own for buyout misses, scope gaps between trades and the ordinary friction of building. Outside it, the owner carries a contingency for its own changes and for anything the GMP excluded. Cost above the ceiling that no change order moved belongs to the contractor. Savings below it go wherever the contract sends them, returned or shared.

The trap in a GMP is treating the ceiling as fixed. It moves by change order for every owner change, every allowance adjustment and every concealed condition the clause lets through. A GMP protects against the contractor’s risks. It does not freeze the owner’s.

What each category sets off downstream

Sorting by cause is half the job. Each category also does something to the draw, the contingency and the float, and those effects are what the lender and the partner are actually asking about.

An owner-side overrun changes the contract sum, so the schedule of values changes with it. The approved change order has to arrive as a new line or an adjusted one before an inspector can verify work against it. A contractor-side overrun does not touch the contract sum, but it can drain the contractor’s contingency line inside a GMP, and a lender reading a shrinking contingency with half the job left will ask why.

Owner contingency should draw against named categories. We carry it the way underwriting attaches contingency to named unknowns: a release request that says which risk it answers, and under which clause.

Time follows the same sort. An owner change that stretches the critical path should carry its time adjustment inside the change order that prices it. A change order that settles the cost and says nothing about the days can be read later as having settled both, and the argument about who owns the delay then starts from a document that looks finished.

The cause category, written on the line rather than implied by it
The clause the adjustment runs under: changes, allowances, concealed conditions, escalation or design responsibility
The change order number, or the reason there is none because the cost stays with the contractor
The schedule-of-values line it draws against, new or adjusted
Its effect on contract time, stated, even when the effect is none

Writing the variance so it survives the questions

A variance report built this way reads differently to the people who fund the work. On an investment or repositioning project the partner can see which overruns came from decisions the ownership made and which came from the contractor’s own number, and can hold each side to its share. On capital improvement work reporting to a board, the minutes can record why a reserve moved without anyone having to reconstruct the reasons months later.

It also changes the conversation with us. When the category and the clause are on the line, the only disputes left are the real ones, and they are few enough to settle while the work is still open and the records are fresh.

If you are about to sign an agreement and want the allowance definitions, the escalation language and the price basis read against the scope before the first draw, request a proposal and we will walk the job and the documents with you.

Frequently Asked Questions

No, and confusing the two causes most of the surprises on tenant improvement work. A landlord’s improvement allowance is a lease term: money the landlord contributes toward the tenant’s build-out, governed by the work letter, sitting between landlord and tenant. It is not part of the construction contract sum. The work letter defines what may be charged against it, which can include or exclude design fees, permit costs, the landlord’s supervision charge, cabling or furniture, and it usually puts anything above it on the tenant. The construction contract underneath can carry its own allowances in the AIA sense. So a single finish upgrade can move two ledgers at once: the construction allowance changes the contract sum, and the work letter decides whether the tenant or the landlord funds the increase. Also check when the landlord pays. Many work letters reimburse after completion against lien releases and a final accounting, which leaves the tenant financing the build-out in the meantime.

Approving a change order and funding it are separate steps. The inspector releases money against the schedule of values attached to the pay application, so the approved change has to appear there as a new or adjusted line, carried on the continuation sheet, before any of it can be drawn. Retainage usually applies to the new line the same way it applies to the others. The more common cause is the balancing requirement in many construction loans: the lender wants the undisbursed loan funds, plus any equity the owner has deposited, to cover the remaining cost of the job. A change order that raises the cost can put the loan out of balance, and the lender may ask for owner equity to go in, or for a reallocation from the contingency line, before releasing anything else. Ask the lender how they handle an out-of-balance loan before the change order is signed, not after the draw is cut.

Owner-furnished items sit outside the contractor’s price, so their cost variance is the owner’s by definition. The larger exposure is what they do to everyone else. An owner-furnished item that arrives late, short or wrong holds up the trade waiting to install it, and that delay is owner-caused: it supports a claim for time and, depending on the contract, for the cost of a crew standing by. Rework caused by a wrong item follows the same logic. When the owner acts as its own builder, the allocation question goes away because every category lands on the owner, including the ones a fixed-price contract would have moved to a general contractor: the estimating miss, the trade that came in above budget, the price movement between quote and order. Each subcontract then carries its own price basis, and the owner is the party coordinating the gaps between them.

Under AIA A201-2017 §3.8.2.3 the allowance adjustment runs in both directions, so an allowance item that costs less than its allowance produces a change order reducing the Contract Sum. Owners forget to claim it, because nobody chases a credit the way they chase a charge. Reconcile every allowance line at closeout, against invoices, before final payment. GMP savings follow whatever the agreement says: returned in full to the owner, or split between owner and contractor on an agreed basis. Either way the savings are computed at final accounting, which is why audit rights on the contractor’s cost records matter. Without them, the owner is taking the reported final cost on trust. If your contract does not say how savings are measured and when they are paid, settle that before the job is far enough along for the answer to have a number attached.

The work keeps going. AIA’s general conditions and many other forms require the contractor to continue performing and the owner to keep making payments under the contract while a claim is pending, so a category dispute does not by itself stop the job. The contract’s claims article sets the path: a written claim within its window, then whatever the agreement names next, an initial decision, mediation, then arbitration or litigation. The practical move is to separate the work from the argument. On AIA forms a construction change directive lets the owner direct the disputed work to proceed with the cost tracked, and the category gets decided later against records. Those records decide it: the walkthrough notes, the drawings that were priced, photographs of the condition before anyone disturbed it, and the notice date. What a dispute clause means for your project is a question for construction counsel.