Definition and Purpose
An allowance in a construction contract refers to a predetermined amount allocated to cover the cost of specific items that are not fully detailed in the contract documents. It provides flexibility in material selection or accommodates situations where the precise scope of work is unknown at the time of contract formation (Ogletree, 2017).
Key Facts
- Definition: An allowance is an amount included in the contract sum to cover the cost of prescribed items that are not specified in detail. It allows for flexibility in materials selection or when the extent of work required is unknown at the time of contract formation.
- Types of allowances: There are two main types of allowances in construction:
- Material allowance: This covers the cost of materials only and does not include labor or design costs.
- Installed allowance: This covers both the cost of materials and labor required for installation.
- Purpose: Allowances are used when the owner has not finalized their selections for certain items, such as finishes, lighting, or plumbing fixtures. They provide flexibility for the owner to make choices during the construction process.
- Adjustments: If the actual cost of the prescribed items exceeds or is less than the allowance amount, adjustments are made through change orders. The contract sum is appropriately adjusted to reflect the variations in cost.
- Handling overages and underages: The contract should clearly define how overages or underages on the allowance amount will be handled. This may include adding the excess amount to the next progress payment or final payment, or subtracting the shortfall from the final contract amount.
Types of Allowances
There are two primary types of allowances in construction:
- Material AllowanceCovers the cost of materials only, excluding labor or design expenses (Markup and Profit, n.d.).
- Installed AllowanceIncludes both the cost of materials and the labor required for installation (Markup and Profit, n.d.).
Usage of Allowances
Allowances are commonly employed when the owner has not finalized their selections for certain items, such as finishes, lighting fixtures, or plumbing components. They enable the owner to make choices during the construction process while ensuring that the overall budget is not exceeded (Ogletree, 2017).
Adjustments and Handling of Variances
If the actual cost of the prescribed items exceeds or falls short of the allowance amount, adjustments are made through change orders. The total contract sum is modified accordingly to reflect the cost variations (Ogletree, 2017).
Contractual Considerations
The contract should clearly outline how overages or underages on the allowance amount will be handled. This may involve incorporating the excess amount into the next progress payment or final payment, or deducting the shortfall from the final contract amount (Ogletree, 2017).
References
- Markup and Profit. (n.d.). Construction Allowances: What They Are, How to Use Them. https://www.markupandprofit.com/articles/allowances-in-your-pricing/
- Ogletree. (2017, May 24). Construction One-Minute Read: Allowance or Contingency? https://ogletree.com/insights-resources/blog-posts/construction-one-minute-read-allowance-or-contingency/
FAQs
What is an allowance in construction?
An allowance is a predetermined amount included in a construction contract to cover the cost of specific items that are not fully detailed in the contract documents. It provides flexibility in material selection or accommodates situations where the precise scope of work is unknown at the time of contract formation.
What are the different types of allowances in construction?
The two main types of allowances in construction are material allowances and installed allowances. Material allowances cover the cost of materials only, while installed allowances include both the cost of materials and the labor required for installation.
Why are allowances used in construction contracts?
Allowances are used when the owner has not finalized their selections for certain items, such as finishes, lighting fixtures, or plumbing components. They enable the owner to make choices during the construction process while ensuring that the overall budget is not exceeded.
How are allowances adjusted if the actual cost of the items varies?
If the actual cost of the prescribed items exceeds or falls short of the allowance amount, adjustments are made through change orders. The total contract sum is modified accordingly to reflect the cost variations.
What should be included in the contract regarding allowances?
The contract should clearly outline how overages or underages on the allowance amount will be handled. This may involve incorporating the excess amount into the next progress payment or final payment, or deducting the shortfall from the final contract amount.
What are the advantages of using allowances in construction contracts?
Allowances provide flexibility in material selection and accommodate situations where the precise scope of work is unknown. They also allow the owner to make choices during the construction process without exceeding the overall budget.
What are the disadvantages of using allowances in construction contracts?
Allowances can lead to disputes if the contract is not clear about how overages or underages will be handled. They can also result in increased costs if the actual cost of the items exceeds the allowance amount.
When should allowances be avoided in construction contracts?
Allowances should be avoided when the scope of work is well-defined and the owner has finalized their selections for all materials and finishes. In such cases, it is preferable to include the specific costs in the contract rather than using allowances.