Construction Allowance
A placeholder dollar amount for something the design hasn't yet decided.
Quick Answer
A construction allowance is a specified dollar amount included in the contract price for work or materials that have not yet been selected or fully defined, such as light fixtures or finish hardware. The final cost is reconciled when the item is chosen: the contract sum goes up or down by the difference.
The Full Picture
Designs are rarely finished when a contract is signed. Owners may not have chosen tile, hardware, or fixtures, and some work cannot be defined until later. Rather than leave the cost out or guess at a final price, the parties agree on an allowance, a stated amount in the contract sum that stands in for the item until the actual selection is made.
The contract documents spell out what the allowance includes. Specifications, often in Division 01, describe whether the amount covers only the material, or also delivery, installation, and the contractor's overhead and profit. These details determine how an overrun is treated. A common arrangement is that the allowance covers the cost of the item, and the contractor's handling, installation, and markup are in the base contract price.
When the owner makes the selection, the contract is adjusted through a change order for the difference between the allowance and the actual cost. If the selected item costs more, the contract sum rises; if it costs less, the sum falls. Many contracts require allowances to be tracked and reconciled openly so that unspent amounts are returned to the owner rather than quietly absorbed.
In preconstruction, allowances are a risk to manage carefully. An allowance set too low makes the bid look competitive but leads to an overrun later; set too high, it inflates the price. Estimators check that every allowance is clearly defined in the bid documents, and that subcontractors are pricing the same scope. An unclear allowance is a common source of disputes.
Real Examples
Common Misconceptions
People assume: People assume an allowance is a contingency.
Actually: an allowance covers a known scope item awaiting selection, while a contingency is a reserve for unknown risks and unforeseen costs.
People assume: People assume an overrun on an allowance is the contractor's problem.
Actually: when the selected item costs more than the allowance and the scope has not changed otherwise, the contract sum is normally adjusted upward.
Frequently Asked Questions
What is an allowance in a construction contract?
An allowance is a specified amount of money included in the contract for work or materials that are not yet selected or defined. The contract price is adjusted when the actual cost is known.
What is the difference between an allowance and a contingency?
An allowance covers a known item that hasn't been chosen, such as fixtures. A contingency is a reserve for unforeseen costs and risks, and is not tied to a specific scope item.
What happens if the actual cost exceeds the allowance?
The contract sum is typically increased by a change order for the difference. If the cost is lower, the contract sum is decreased.
What should an allowance include?
The specifications should state whether it covers material only or also delivery, installation, and overhead and profit. Unclear wording leads to disputes.
Why do allowances matter in preconstruction?
They affect both price and risk. Estimators need to confirm each allowance is clearly defined and realistic, so the bid is comparable and the owner is not surprised later.