An allowance is a budgeted amount set aside in a construction contract for items that have not been fully specified at the time of bidding. It accounts for uncertain costs, such as finishes, specialty materials, or equipment selections.
How Allowances Work in Construction
Owners and contractors agree on an estimated cost for an item or category, but the final price may vary once selections are made. If actual costs exceed the allowance, the owner typically covers the difference; if they are lower, the savings may be credited back.
Managing Allowances Effectively
- Clearly define allowance categories in the contract to avoid disputes
- Select materials and finishes early to minimize cost uncertainty
- Ensure proper tracking of actual expenses to adjust allowances as needed
Related Terms: Contingency Budget, Change Order, Cost Estimation, Unit Pricing
FAQs
How do allowances differ from contingency budgets?
A: Allowances cover specific undecided costs, while contingency budgets account for unforeseen project expenses.
Can allowances lead to cost overruns?
A: Yes, if underestimated, they can cause budget shortfalls. Accurate pricing and early selection help mitigate this risk.