They are often necessary to provide a degree of flexibility for contractors when determining the bid for the project. They pertain to costs that may not be accurately assessed until the project is underway.
This might occur when a homeowner can select from a variety of styles of appliances or different materials, but has yet to make a decision before the actual work begins. However, they can also be used by less-than-scrupulous builders to provide bids that appear lower than a competitor who does account for any extra costs in their bid. For instance, one bid may account for the cost of a bathtub and the labor to install it, which is usually standard in most professional services contracts.
The less-than-complete bid, on the other hand, may not account for any labor in their original bid and add that onto the final bill under the construction contract allowance.
This lack a familiarity with this important part of a contract can, and sometimes is used by a builder to obtain an unfair advantage over the competition and usually results in problems for the customer when they realize how the allowances impact them. There are basically two reasons why allowances are necessary to be established in a contract. One reason is that the cost of a particular item cannot be known prior to construction.
Since the well is generally priced by how deep the driller needs to go to find good potable water, the cost cannot be determined until it is installed and thus an allowance for that work needs to be established ahead of time. The other reason an allowance is necessary is that some decorator items included in the contract are typically not selected by the customer prior to the start of the project.
These items, such as cabinetry and floor covering are priced according to grade or per unit of measure and the range of pricing can be substantial. A builder must establish an amount to figure into the cost of the home for these items and this amount is then used as the allowance for those particular items. Normally these differentials to the allowances are logged by the builder and are applied to the final settlement at closing.
Difficulties can arise for the customer if they are not fully aware of these allowances and if they are sufficient to allow for a fair amount of selections. Some builders will purposely include unrealistically low allowances to keep their bid low and this leaves the customer with very few selections without exceeding the allowance. Also a customer most likely will have their financing in place prior to construction and the amount of the loan may not be increased to cover any overages when the project is completed.
This can obviously cause significant financial hardship in finding other methods to cover the overage amount. When pricing out a project, we make the customer very aware of the allowances in the contract. We make certain that they compare our allowances with our competitors to make certain they are sufficient. We also advise them that we have used mid-range product pricing to establish our allowances.
Ask if they have any questions. If they are clear on how the allowances work, have the initial the page with these clauses to reduce the risk of arguments down the road. They reduce the risk of underestimating the cost of getting items installed. They can also reduce your overall markup if the variance between the allowance and the actual amount is too great. There are many ways to handle allowances; this is my thinking on the subject. I look forward to hearing from others. Disclaimer: Nothing in this article or on our website is intended to be, or may be construed as, legal advice.
I am not an attorney. You must consult an attorney before using any suggested language or any other information contained in this article or on our website to determine if it conforms to your state laws or your particular situation.
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