Taxes, escalation, allowances and contingency

After direct costs, general conditions and markups, four items remain that can quietly add or remove several per cent from a bid: sales taxes, escalation, allowances and contingency. Each is easy to misunderstand. Taxes depend on who is legally the consumer of the materials and on the jurisdiction. Escalation depends on when the money will be spent, not when the bid is submitted. Allowances are amounts the owner tells bidders to carry, with rules about what they include. Contingency is the price of uncertainty, and its size should reflect how much the estimate does not yet know. CON-200 introduced taxes on materials and price escalation at the level of individual quotes; this lesson treats them at the level of the whole bid.

Sales taxes in a construction bid

In Canada, two layers of sales tax can apply. The federal Goods and Services Tax (GST) of 5 %, or the Harmonized Sales Tax (HST) in participating provinces, is a value-added tax: the contractor pays it on materials and services it buys, charges it on its own invoices to the owner, and claims input tax credits for the tax it paid. For a registered contractor, GST and HST paid on inputs is therefore recoverable and should not be included in the estimate as a cost. The contractor charges GST or HST on each progress billing, so stipulated price bids are normally submitted exclusive of GST or HST unless the bid form says otherwise.

Provincial sales tax is different. British Columbia, Saskatchewan and Manitoba levy a separate provincial sales tax (PST or RST) that is not recoverable. In those provinces, a contractor that supplies and installs materials into real property is generally the consumer of those materials and pays PST on their purchase price, so PST is a real cost to carry in the estimate. Saskatchewan also applies PST to the full contract price of construction services on most non-residential real property, which the contractor charges to the owner. Quebec applies the Quebec Sales Tax (QST), a value-added tax similar to GST with its own input tax refunds. Rules change and have many exceptions, so the estimator should confirm current treatment with the firm's tax adviser for each province.

Because most material tax sits inside subcontract quotes, the general contractor's main task is to make sure every quote states its tax basis consistently: whether provincial or state taxes are included, and on a Canadian bid that federal tax is excluded. A quote that includes recoverable tax, or excludes non-recoverable tax, distorts levelling (Lesson 7).

Escalation to the midpoint of construction

Construction prices change over time. A bid submitted today will be built over the next year or two, and the costs that matter are the costs at the time each item is bought, not at the time of the bid. Firm quotes from subcontractors and suppliers fix some prices, but many quotes are valid only for 30 to 90 days, some contain escalation clauses for volatile materials, and the general contractor's own labour rates will rise with collective agreements. Escalation is the allowance for these increases.

A common method is to escalate each cost from the pricing date to the midpoint of the period over which it will be spent. For the whole project, the midpoint of construction (or more precisely, the cost-weighted midpoint of the spending curve) is a reasonable proxy. Because escalation compounds, the factor is the annual rate raised to the number of years from the pricing date to the midpoint.

Statistics Canada's building construction price indexes give a picture of recent cost changes by city and building type. In the second quarter of 2026, for example, the composite index for 15 census metropolitan areas rose 1.4 % from the previous quarter for non-residential buildings and 3.5 % from a year earlier. Past changes are not a forecast, but they help calibrate the rate. Volatile materials such as steel, copper, aluminium and some electrical equipment can move much faster than the index, and trade measures in 2025 and 2026 added to their volatility.

Allowances

An allowance is an amount specified in the bid documents for an item whose details have not been decided, such as finish hardware, signage, artwork, or the cost of unknown site conditions. Every bidder carries the same amount, so the allowance does not affect competition. The contract then adjusts the price up or down when the actual cost is known. The key question is what the allowance covers. In many contracts, a cash allowance covers only the net cost of the materials or the subcontract, and the contractor's other costs (handling, installation if not included, overhead and profit) must be included elsewhere in the bid. If the estimator assumes the allowance covers everything, those costs are missing.

Under CCDC 2, cash allowances cover the net cost to the contractor of services, products, construction machinery and equipment, freight, unloading, handling, storage, installation and other authorized expenses, but not value added taxes such as GST or HST payable by the owner, unless the contract says otherwise. The contractor's overhead and profit in connection with cash allowances are included in the contract price but not in the cash allowances themselves. Supplementary conditions often modify these rules, so the estimator must read them.

Contingency

Contingency is an amount added to cover costs that are expected to occur but cannot be identified individually at the time of the estimate: quantity errors, minor scope omissions, pricing uncertainty, unexpected conditions within the contractor's risk. It is not a substitute for pricing known risks (which should be priced explicitly, Lesson 11 and CON-350) and not a hidden profit. Different parties carry different contingencies. A contractor's estimating contingency covers its own uncertainty in a stipulated price bid. A design contingency in an owner's budget covers design development. An owner's construction contingency covers changes the owner will pay for after award. Confusing them leads to double counting or gaps.

The size of contingency should reflect the maturity of the information. AACE International's recommended practice for estimate classification describes typical accuracy ranges by class: a class 5 estimate (concept screening, about 0 to 2 % of design complete) might range from 20 to 50 % low to 30 to 100 % high, while a class 1 estimate (check estimate or bid on complete documents) might range from 3 to 10 % low to 3 to 15 % high. CON-200 introduced these classes; here they help explain why contingency is large early and small at bid time.

One way to set contingency is to model the uncertainty in the main cost items and simulate many possible outcomes. A Monte Carlo simulation draws random values for each uncertain item from a chosen distribution, adds them up, repeats the process thousands of times and reports the distribution of total cost. The contingency is then the difference between the base estimate and a chosen confidence level, such as the 80th percentile (P80).

import random
random.seed(42)
# Uncertain cost items: (base estimate $, low factor, most likely factor, high factor)
items = {
    "Self-performed concrete": (1_920_000, 0.95, 1.00, 1.15),
    "Mechanical":              (2_850_000, 0.97, 1.00, 1.08),
    "Electrical":              (1_640_000, 0.97, 1.00, 1.07),
    "Envelope":                (1_480_000, 0.96, 1.00, 1.10),
    "Other subcontracts":      (2_300_000, 0.98, 1.00, 1.05),
    "General conditions":      (  910_000, 0.95, 1.00, 1.12),
}
base = sum(v[0] for v in items.values())
totals = sorted(sum(b * random.triangular(lo, hi, ml) for b, lo, ml, hi in items.values())
                for _ in range(20_000))
p50, p80 = totals[len(totals) // 2], totals[int(0.8 * len(totals))]
print(f"Base estimate ${base:,.0f}")
print(f"P50 ${p50:,.0f}  P80 ${p80:,.0f}")
print(f"Contingency to reach P80: ${p80 - base:,.0f} ({(p80 - base) / base:.1%})")

Base estimate $11,100,000
P50 $11,302,199  P80 $11,414,510
Contingency to reach P80: $314,510 (2.8%)

Because the uncertainties are skewed upward (costs are more likely to rise than fall), even the median outcome is above the base estimate. A contingency of a few per cent brings the bid to the 80th percentile. Simulation is only as good as its inputs, and it ignores correlations between items unless they are modelled, but it makes the discussion of contingency explicit and repeatable instead of a number pulled from the air on bid day.