A construction allowance is a sum of money included in a construction contract to account for items that need to be provided in the project but which may not have been specified by an architect at the time the bid was required.

Allowances are typically used for finishes and fixtures, things like flooring, tile, bathroom vanities and kitchen counters and appliances.

In a contract for construction, an allowance is usually as simple as a line in the contract listing an item and a cost, such as “Hardwood Flooring Material: $15,000” Since the drawings have not required a specific flooring selection, the homeowner then selects a floor product they like.

If the cost of the flooring the homeowner ultimately chooses is more than $15,000 they will get a change order for the increased cost. If the cost of the flooring they choose is less than $15,000 they should get a credit or a change order showing a negative number, thus reducing the cost of the contract. And if the cost of the flooring is exactly $15,000, well, that’s pretty impressive.

Who Sets the Construction Allowance?

Usually the builder will have to do this when creating an estimate from a set of plans that don’t specify all the different finishes and fixtures.

When creating bid drawings for my clients, when I have not been hired to make the actual selections, I always provide construction allowances that contractors must use in their bids. This is not common, but there are a handful of reasons I do this instead of leaving it up to a builder and one of a number of things I do beyond what other architects might provide. See my somewhat related post on architecture design fees.

1. At the time the project goes out to bid, no one is more familiar with the scope of the project or the expectation of quality than I am. It is easier and more accurate for me to let the builder know how much of a finish material is needed than it is for them to create an estimate by measuring the drawings.
2. I set an allowance high enough that homeowners will be able to make quality selections within the budgeted amount, or decide to save money with a lower cost option or spend more with a premium product. But you will NOT be stuck with the low cost option because the winning bid used an unreasonably low allowance
3. Construction bids vary greatly in their format, delivery method, quality and detail. If you get three bids for your project you could be looking at three differently formatted documents with different line items. It’s sort of like comparing apples and lawnmowers. In some cases, it may not be clear whether a number for “flooring” includes material and labor or just one of the two. If I set an allowance for flooring, or light fixtures or countertops or vanities then all bids are required to explicitly have that number for material costs. We can then more easily discern labor costs and how closely a bidder looked at the drawings.
4. If I specify an allowance a contractor can not artificially make their bid look lower than it is by hiding an unrealistically low cost of finish materials. This is more or less what I said in 2, but now my list looks longer.
5. Contractors already have enough to do! When pricing a project they have to figure out the lumber and drywall costs, get estimates from all the subcontractors (masons, electricians, plumbers, painters, etc.) They have to account for unknown conditions, things not shown in the drawings, how long the project might take, specialty equipment they have to rent or buy, profit they need to make, how difficult the site is to access, their current projects and more. Literally hundreds of things. If I give them their allowances it takes one thing off their plate and makes their job easier. Builders usually like this because most of the builders I know are not concerned with their bid being too high, but with the owner not realizing that their high bid is actually just a more accurate bid. If I provide the allowances it helps level the playing field a little.

DO YOU NEED TO USE AN ALLOWANCE?

You don't need to use allowances, they're just really convenient for a number of reasons. And if you don't have an allowance you either need to make all your selections before signing a contract (so costs are known) or just accept that every fixture and finish you select is going to increase the cost of the contract, because the allocated money for that item is $0.

BENEFITS OF CONSTRUCTION ALLOWANCES

The biggest advantage of using a construction allowance is that construction allowances let the project proceed by postponing decisions until they actually need to be made. You do not need to know what floor tile you want in your powder room in order to get a building permit. Knowing that there is tile and generally how much of it needs to be installed lets the builder understand the amount of work involved. You can continue the design, permitting and even a good amount construction before actually needing to make a lot of these decisions. If you had to make every decision on every finish and fixture before starting construction, the design phase would last far too long for all but the most high-end projects.

Construction allowances can also help an owner develop a realistic sense of cost. What's a reasonable amount of money to spend on bathroom vanities? What do other people usually do? Where should I be shopping for this stuff? These are common questions homeowners have which an architect or a builder has more insight at the start of a project.

Finally, construction allowances can give the owner more control over the total construction budget. Things like lumber costs, drywall, subcontractor labor and dumpster rental are all beyond the control of the owner, and usually even the builder. If you need to stick within a certain maximum budget the allowances let you control what you spend on your finishes and fixtures.

 

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