A large building project requires hundreds of decisions, big and small. Many involve choosing products and materials, especially fixtures and finish materials such as paint, carpeting, tile, bathroom fixtures, cabinets and counters, electrical fixtures, towel racks, toilet paper dispensers, and on and on. Some people find this a delightful challenge; for others it’s a nightmare of too many choices and not enough time.
A well-organized contractor will assign you deadlines for making these decisions, and may provide you with samples and color charts – or at least direct you to retailers with whom they commonly do business.
So allowances are a useful tool to buy you a little time to make final product decisions. But keep them to a minimum. All allowance items should be strictly defined and itemized, not a general category like “landscaping.”
Unknowns in Bid Price
Often, the choices are not known at the time a job is bid, so the contractor puts in an estimate of the cost, called an “allowance.” For example, the fixed-price bid might include material allowances of $6,000 for kitchen cabinets and countertops, $15 per sq. yd., for carpeting, and $5 per sq. ft. for ceramic tile.
If you exceed the allowance, you will be charged the difference. If you are under, you will receive a credit. Most contractors will also add markup to the allowance price as with other materials they purchase. If you are buying the products yourself, they typically do not add markup, but are not responsible for product quality, quantity, and warranty issues — not always a good thing.
If your contractor priced the job, allowing $5,000 for “builder-grade” cabinets and Formica counters, but you had in mind solid cherry and granite, you will probably not be happy to discover that the real cost of cabinets and counters is $15,000. Similarly, carpeting can range from under $10 per yard to over $40. Ceramic tile can range from $1 per sq. ft. at a home center to well over $10 per sq. ft. for high-end products.
Allowances are also sometimes used for unknowns such as well drilling or removal of underground ledge. You will be quoted an estimate based on a best guess, with the actual price based on the depth of the well or cubic feet of ledge removed.
Use Realistic Prices
A conscientious contractor will put in realistic allowances, in line with the quality of construction and overall budget of your project. To prevent unpleasant surprises, do research up front on realistic prices for the products you plan to use.
If you are looking at competing bids, compare the allowance figures – low-balling allowances is an old trick to make a bid look attractive. By all means, avoid using allowances on high-ticket items such as windows. The cost difference between “builder-grade” windows and premium windows can be thousands of dollars for a house or addition. Read more on how to spot Inadequate Allowances.
Materials-Only vs. Materials & Labor
Allowances can be either materials-only or include both materials and labor. For example, if you have not decided between carpeting and hardwood floors, it’s tricky for the contractor to include the labor charge in the original bid, especially if these are installed by subcontractors at a turnkey price. Still, the contractor should be able to provide you with a range for prices for carpeting and a range of prices for hardwood.
For work completed by the contractor’s crew, there is rarely a reason to include labor in the allowance. It costs the same to install oak flooring and or maple flooring. If one product is known to be more expensive to install, the contractor can reserve the right to add a surcharge and should inform you about that ahead of time. However, allowances should never include soft costs such as design, permitting, or other services.
Including labor adds greater uncertainty in the pricing and may essentially turn that portion of the contract into a cost-plus bid, depending on the contract language. Make sure you get a fixed price for the allowance work once you make your selection — not a bill at the end based on the contractor’s expenses (the cost-plus approach).
To reduce risk, its best to limit allowances to materials-only for a specific material or product to be chosen. For example, with ceramic tile, the allowance should cover just the tile you pick, not the labor to install it. The fixed bid should also include the thinset, grout, membranes, and other setting materials. Only the unknown item, the tile itself, should be covered by the allowance. That leaves less uncertainty in the bid.
Whenever possible, eliminate all uncertainty (and all allowances) by making product selections before the bidding process. That way, you will get real prices, not guesstimates.
With regard to well drilling, ledge removal, and other high-ticket items, ask whether the contractor will do the job for a guaranteed price rather than an allowance. You may pay a premium for the security of a fixed price, but it might be worth it to you.
Make sure the allowance procedure is spelled out clearly in the contract. How much will the allowance price be marked up for overhead and profit? Do you need to shop at the supplier provided by the contractor? Will you be getting his discounted price or the retail price. If he gets a discount from the price you are quoted and then marks up the cost again, this is a form or double-dipping. Ask that the allowance be based on the contractor’s cost of goods.
If you select products under the allowance price, will you receive a credit, as you should? And will the credit include any markup (if the allowance prices include markup)?
To protect yourself against unpleasant surprises, it is a good idea to add language to your contract requiring the contractor to notify you about allowance overages ahead of time. For example: “Contractor shall promptly notify Owner in writing, prior to performing the work, of any material choices or other changes in the plans which shall increase the contract price or any allowance price.”
View the Allowances clause in our Model Construction Agreement.
Bottom line. Allowances are a necessary evil. Make sure that the allowances in a contractor’s bid are realistic. To the extent possible, make selections for big-ticket items like doors and windows, kitchen cabinets, and bathroom fixtures before soliciting bids.
See also What’s A Fair Allowance?