Key Takeaways

  • A construction allowance is a budget placeholder in a contract for items not yet selected or fully specified.
  • Allowances come in two main types: material and installation allowances.
  • Poorly managed allowances can lead to disputes, surprise costs, or unrealistic bids.
  • It is critical to specify allowance values, selection timelines, and change order procedures in the contract.
  • Allowances should include clear descriptions and realistic cost estimates to avoid underbudgeting.
  • Effective allowance management requires transparency, documentation, and proactive communication between contractor and client.

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.

Common Allowance Items in Residential Construction

Some of the most frequently included items in construction allowances are:

  • Flooring: Hardwood, tile, carpet, or laminate selections.
  • Cabinetry and Countertops: Especially when custom options are being considered.
  • Light Fixtures and Plumbing Fixtures: These often vary widely in price and style.
  • Appliances: Builders may include basic models in their estimate, allowing the homeowner to upgrade within the allowance.
  • Landscaping or Exterior Features: Especially if design choices are left until the end.

Each of these items should have a clear budget assigned and be reviewed during the planning phase to minimize later changes.

How Construction Allowances Affect Project Budgets

Construction allowances can significantly influence a project’s budget and timeline. When these allowances are underestimated or poorly defined, they create a risk of unexpected costs. For instance, if a project includes a $1,500 allowance for kitchen cabinets but the homeowner selects materials costing $2,500, the $1,000 overage must be addressed through a change order. This not only impacts the budget but can delay timelines if selections aren't made on time.

Builders and homeowners should treat allowances as provisional figures—temporary estimates that require prompt finalization. It’s best practice to:

  • Set realistic allowance amounts based on current market prices.
  • Include specific descriptions of what the allowance covers.
  • Document selection deadlines in the contract.
  • Clarify how overages and underages will be reconciled.

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.

Legal Tips for Including Allowances in Contracts

To reduce the risk of disputes over allowances, construction contracts should address:

  • Allowance descriptions: Clearly define each item and its scope.
  • Reconciliation procedures: Explain how cost differences will be handled—whether through credits or change orders.
  • Documentation: Require that selections and associated costs be documented and signed off before procurement.
  • Responsibility: Clarify which party is responsible for initiating purchases or subcontracting work related to allowance items.

Including these provisions ensures both parties have a mutual understanding and legal clarity.

Allowances vs. Contingencies: Know the Difference

A common point of confusion in construction contracts is the distinction between allowances and contingencies.

  • Construction Allowance: A line item in the budget allocated for materials or labor not yet fully specified. It is tied to specific items that the client will choose later.
  • Construction Contingency: A reserve fund set aside to cover unforeseen conditions or issues that may arise during the project. It is not earmarked for any one item.

Understanding this difference is essential. Mislabeling these items can lead to accounting errors and misunderstandings about what the builder is contractually responsible for covering.

Best Practices for Managing Construction Allowances

To ensure construction allowances serve their intended purpose without causing disputes, adhere to the following best practices:

  1. Define Allowance Items Clearly: Every allowance item should be listed with a clear description of what is included and what is not.
  2. Use Market-Based Estimates: Base allowance values on actual pricing data or supplier quotes to ensure they reflect current market conditions.
  3. Set Selection Deadlines: Include firm deadlines for the client to make final selections, helping avoid project delays.
  4. Track and Document Changes: Any adjustment to an allowance should be handled with a written change order that both parties sign.
  5. Communicate Frequently: Keep lines of communication open between contractor and client to discuss allowance balances and any adjustments needed.

These strategies reduce the chance of misunderstandings and help keep the project within budget.

Frequently Asked Questions

  1. What is a construction allowance in a contract?
    A construction allowance is a set dollar amount in a contract to cover materials or labor not yet fully specified at the time of agreement.
  2. What’s the difference between an allowance and a contingency?
    An allowance covers known, unspecified selections (like fixtures), while a contingency is a reserve for unforeseen issues.
  3. Can allowances be changed during a project?
    Yes, but any changes should be approved via written change orders signed by both the contractor and client.
  4. How should contractors estimate allowance amounts?
    Allowances should be based on realistic, up-to-date pricing to avoid underestimating costs and creating disputes.
  5. Why are construction allowances controversial?
    They can be misused to make bids appear lower or cause surprise costs later if not clearly defined and managed.

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