Construction Contract Allowances: Everything to Know
Construction contract allowances are common provisions in agreements between builders and customers to cover costs implicitly accounted for in the contract.3 min read
Construction contract allowances are common provisions contained in agreements between builders and customers to cover costs not explicitly accounted for in the final contract. They are commonly found in contractor bids for new homes or remodeling projects. For someone not familiar with the bidding process, the purpose for a construction contract allowance may be unclear. However, understanding why this allowance exists and how it is applied can save a customer a few surprises when the final bill comes due.
They are often necessary to provide a degree of flexibility for contractors when determining the bid for the project. They pertain to costs that may not be accurately assessed until the project is underway. This might occur when a homeowner can select from a variety of styles of appliances or different materials, but has yet to make a decision before the actual work begins.
However, they can also be used by less-than-scrupulous builders to provide bids that appear lower than a competitor who does account for any extra costs in their bid. For instance, one bid may account for the cost of a bathtub and the labor to install it, which is usually standard in most professional services contracts. The less-than-complete bid, on the other hand, may not account for any labor in their original bid and add that onto the final bill under the construction contract allowance.
Two Types of Allowances
The two most common types of construction allowances found in contracts are material and installation allowance amounts.
- Material Allowance Amounts: This is often found when the customer can choose from a wide variety of material. A good example would be the costs for flooring or carpeting. There could be quite a wide discrepancy in the actual cost of the flooring, say in the case of linoleum versus tile. It would be unfair to expect a contractor to give an estimate without knowing which of these materials would be installed.
- Installation Allowance Amounts: Sometimes design elements may create installation challenges depending on the material selected. These might require a level of installation experience or expertise or more time to perform the work. Consider the difference between creating an exterior of a house with brick as opposed to fieldstone. The cost of the two materials isn’t that great. However, a stonemason is a craftsman with higher labor costs than a bricklayer. If at the last minute the homeowner opts for fieldstone, the builder should be able to adjust the bid price accordingly.
Allowances should be negotiated in the contract before work begins. A key issue will be how to account for either an overage or underage allowance amount. Both should be credited to make sure both parties are treated fairly.
Important Considerations Regarding Allowances
Understanding the benefits and drawbacks of construction contract allowances can help create a smoother experience for both the contractor and customer, especially where the contractor is concerned. Keep these points in mind:
- Construction allowances should be avoided. The more construction allowances, the more opportunities for misunderstandings between the two parties. Customers should come into the project with a clear idea of what the finished project will look like. Contractors should encourage their customers to make all material selections before submitting the bid.
- Contractors should educate their customers about allowances and about the way it may affect the bid versus those of the competition, if it becomes clear that important decisions will be put off until the work has begun. Customers should ask questions when they see construction allowances existing in their contractors’ bids.
- Customers should acquaint themselves with material costs. Contractors should be able to clearly explain every instance where an allowance is contained in the contract and how the final price will be affected.
- Contractors should provide a work order for the allowance immediately upon completion of the work or purchase of material. Customers should insist on seeing work orders for every project when allowances come into play.
- Contractors should insist that changes, as pertaining to cost allowances, are approved by the client before they lay out any money for the new materials of labor. Customers should request that the contractor secure approval before spending additional funds for materials or labor costs.
While far from an ideal facet of a home building or remodeling project, cost allowances serve a purpose. Preparing beforehand for the unexpected or unplanned can make the process run much smoother for both parties.
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