Allowances

Understanding Allowances in Construction Projects

In construction, an allowance refers to a predetermined budget set aside for a specific item or category of work that has not yet been selected. Allowances are commonly used for items such as cabinetry, countertops, plumbing fixtures, and lighting fixtures, where the final choice of materials or products will be made later in the project. By incorporating allowances into a project estimate, contractors ensure that costs remain within the contracted budget while allowing clients the flexibility to make selections without being rushed.

However, allowances must be managed carefully to be effective. When used appropriately, allowances provide a way to streamline the construction process while offering clients clarity and control over their material choices. They serve as placeholders, giving clients the ability to adjust selections as the project progresses, without delaying the overall timeline. This approach helps maintain momentum while keeping the project within budget.

That said, the improper use of allowances can lead to budget overruns and client dissatisfaction. Some contractors may intentionally set allowance amounts too low in order to present an artificially low bid. This tactic can mislead clients, creating an expectation of lower costs, only for them to later discover that the allowance covers only the lowest-grade materials—or, in some cases, doesn’t cover the item at all. This can result in unexpected expenses and frustrations.

Additionally, many contractors apply a markup—typically 20% or more—on any allowance overages. This means that if the client selects materials or products that exceed the allowance, the client ends up paying significantly more than initially anticipated. Often, these costs can exceed what would have been paid had the contractor set a more realistic allowance to begin with. This practice can lead to unnecessary stress and confusion throughout the project.

The Importance of Realistic Allowances

A reputable contractor will provide reasonable allowances that reflect the quality of materials and fixtures clients expect, in line with their vision and budget. Rather than deliberately underestimating allowances to make an initial bid seem more affordable, trustworthy contractors take the time to explain the materials covered by each allowance. This approach ensures that clients are aware of what each allowance can realistically cover and can make informed decisions about their selections.

Providing transparency and guidance throughout the process is crucial. Clients should be given actual examples of what their allowance covers so they can understand the value of different choices. This transparency also allows clients to compare bids from different contractors, ensuring that they are making an "apples-to-apples" comparison. A detailed Allowance Schedule should be included in both estimates and contracts, outlining the expected costs for materials and other selections. This helps ensure there are no surprises later in the project.

What Happens if the Actual Spending Differs?

If actual spending differs from the allowance, contractors typically adjust based on the differences. For example, if one item exceeds its allowance but another comes in under budget, the overage may be balanced out by the savings elsewhere. If the overall spending is under budget, the remaining allowance is considered "client money" and is credited toward the final payment.

In rare cases where the total allowance is exceeded, the client will be responsible for covering the difference. However, a reputable contractor will aim to keep the project within the originally agreed-upon budget. The goal is always to ensure that the project ends with a credit to the client, reflecting the contractor’s careful management of allowances.

By managing allowances effectively, contractors can help clients feel confident that their budget is being respected and that the project will be completed to their satisfaction, without hidden costs or last-minute surprises. Transparent communication about allowances is essential for maintaining a positive contractor-client relationship and for ensuring the success of a construction project.