What are Construction Allowances and How Do I Compare Them When Reviewing Bids?
- An allowance is a placeholder in a bid or in the contract amount
- Minimize or eliminate if possible the total number of allowances in your contract
- Always bids ‘apples to apples’ especially as to allowances
An allowance is a line item on the documents or the contract if you have already signed the contract. it is a placeholder for an item to be supplied or the work to be done for that amount of money stated. For instance, an owner may get a line item allowance for flooring, and it may say $30,000. This means that the contractor has not determined, or you haven’t told the contractor certain details regarding the work. In this type of situation, the contractor can decide to put a placeholder in the bid or in the contract amount. An honest contractor will make an effort to give you an allowance that has some resemblance to your job, so they may put $30,000 as stated in the example because they honestly believe that $30,000 should be more than enough to cover that item.
However, some unscrupulous contractors intentionally put a low amount in the allowance to make their bid attractive to you as an owner. These contractors put this amount knowing fully well it cannot be enough to complete the project. They know fully well that the flooring project is going to cost about $50,000 but put $30,000 in the allowance. These contractors run a series of allowances together that may be under what it truly will cost. Their total bid seems more attractive to you. When they add up all of the allowances and the non-allowance items, they come up with a lesser bid. For example, let’s say the contractor came up with one million dollars and when you compare it to another contractor whose bid is a $1.3 million, it is only logical for you to prefer the cheaper option. But unless you even the playing field, so that you compare apples to apples between one contract bid and the other especially as to allowances, what you may learn after the fact, of course, is that the contractor that bid one million dollars has an actual price of $1.3 million. This is because he didn’t take into account or he intentionally lowered his allowance amounts. So that when you actually spend the money, it wasn’t thirty thousand for the floor, It was fifty thousand. You need to understand that allowances are a potential landmine in your bid and in your contract. How do you deal with this potential landmine in your bid and in your contract?
Try to minimize the total number of allowances in your contract
If possible, keep them to the absolute minimum so that when you compare one bid to another, they have the lowest number of allowances possible. But if you need some allowances, you need to make sure that when you compare one bid to another the allowance items are equivalent. For instance, in the same scope of work, one allowance may show 50 items and the other may show 30 items. You need to ask the contractor why his allowance show 50 when another contractor’s allowance showed 30 items and vice-versa. Getting a clear understanding of why that is, ensures you are better protected when you sign the contract. Understand the risk because understand any amount you spend over in a construction project is going to be a change order to you and you’re not going to be able to argue about it later. So, try to minimize the number of allowances you have in your contract, compare them apples to apples, question the contractor and, if possible, eliminate them completely from your contract.