Construction contracts often include allowances. I use allowances in contracts for my San Francisco-based construction business. Allowances can initially be confusing for the property or business owner, but they’re actually quite simple.
An allowance is a price specified in a construction contract as a placeholder for an owner’s final selection, in order to establish a baseline budget for that part of the project. Sometimes the allowance amount is associated with a proposed material or item – an “allowance material”. If the allowance is just a monetary amount, when the customer makes a final selection the actual price is paid instead of the allowance amount. If the allowance includes a proposed material, then the owner can choose that material, for the allowance amount, or the owner can choose another material, for that material’s price. Allowances are useful because they allow contractors and owners to sign a contract before all the details are finalized.
A home remodeling contract might say that the family room flooring is an allowance material – 2 ¼ x ¾ northern red oak tongue and groove flooring from Mullican, with Basic StreetShoe finish, at a price of $20/square foot. If the owner still wants that flooring when it’s time to order materials, then I will install that flooring, at that price. If the owner chooses another material, the cost will probably be different. The allowance gives the owner the freedom to choose another material, and it leaves both of us some flexibility on cost: the owner can choose a less expensive material and pay less, but if the owner wants a fancier material, I’ll get paid more.
Alternatively, my contract could say simply that the total contract price includes an allowance for flooring at $20/square foot, and that the final price paid by the homeowner will be the actual cost of the flooring (plus my mark-up, etc.)
Why Use Allowances?
Allowances make it possible for the owner and contractor to sign a contract and start a project, without waiting for every choice to be made. In California, where I have my construction business, allowances are practically a legal necessity. California home improvement contracts must include a total contract price, and often the best way to provide a total price when details have not been finalized, is to use allowance materials. If we don’t put the allowance material in, then it’s difficult to claim that we’ve set a total contract price.
Another purpose of allowances is to acknowledge the different roles of contractor and client. My role as contractor allows me to choose many of the materials used in a project. In particular, I will choose construction materials that are either hidden, or that are commodities – sheetrock, paint primers, lumber, nails, concrete, etc. Allowances explicitly acknowledge that some choices, in particular finishes, are left to the customer.
Be Careful with Allowances
Most contracts for significant work include allowances, and property and business owners should look at them very closely in order not to be surprised later on. Many property owners have been unpleasantly surprised when the final material selection was much more expensive than the allowance, and the difference significantly changed the total contract price. Some contractors always include a less expensive or possibly mid-range material as an allowance, in order not to discourage the client owner from going ahead with the project; as a result, most changes result in an increase in the contract value and cost to the client. Owners should be aware of this and look carefully at allowance amounts.
Bigger problems arise when the allowance amount specified in the contract is much too low, or the allowance material is a low-quality, low-priced material, and its inclusion in the contract unrealistically deflates the initial contract price. I like using allowance materials rather than just allowance amounts, and I like to provide my prospective customers with material samples and literature. That way, we can choose an allowance quality and price that are reasonable for the specific project. Homeowners presented with a low-quality allowance material should ask their contractor to provide a more reasonable allowance material, in order to get a more accurate idea of the total project cost.
The conventional way for owners to make their final selection for an allowance is through a written change order. Whether the owner is choosing a material to substitute for the allowance amount or material, or the owner is confirming the allowance material in the contract, the final selection and price should be made in writing.