Keep eye on allowance

The allowance you got when you were a kid is nothing like an allowance in a construction contract. Unlike your parents, your contractor is not giving you anything when an allowance is included in the deal.

If you are getting ready to hire a contractor, you should clearly understand what an allowance is, how it relates to the project and how to best determine whether it is reasonably accurate.

An allowance in a construction contract refers to a dollar value (or monetary allowance) that is assigned to an item of work (e.g., light fixture budget, plumbing fixture budget, painting budget).

In theory, this practice is used by architects, engineers, designers (and other construction professionals) to establish budgetary guidelines. This is only done when details or specifications are not available for the work in question, although it is important to make sure that every item in the budget be assigned a value. Using an allowance instead of pricing specific items can be risky.

With allowance items, if the value of the allowance in the contract is greater than what is needed to make the actual purchase, the contractor will normally refund the difference to the client. On the other hand, if a greater sum of money is needed to purchase an allowance item, it comes out of your pocket even if the contract is for a fixed price.

There is a major downside to using allowance budgeting. Unscrupulous contractors will use allowances to reduce their bid in hopes of getting the client to sign on the dotted line.

In a kitchen remodel, for example, a contractor might assign cabinetry, countertops and appliances as allowance items, saying that the items can be purchased for the values he included. The problem arises when the client decides to purchase the items and discovers that the level of quality isn’t what was expected, resulting in a major budget crunch.

Solve the problem before it becomes one.

Once the “blueprint” or “basic set of plans” has been developed, the next step is to create a corresponding set of details known as “specifications.” The specifications explain, in depth, each of the elements contained in the plan.

For example: Where the plan might show a sink, the specifications would indicate the brand of the sink, model number, size, color and even what it’s made of. Generally speaking, the more thorough the specifications are, the more accurate the bids will be.

Remember: If it were your home that was going to be remodeled or built, no one could know exactly what the entry porch light fixture was going to look like until you selected the one you wanted.

To ensure that your bid is as accurate as possible, the prices contained therein should be based on an existing specification that lists exactly what you want – in detail.

You don’t have to use an allowance even if you haven’t made a decision on exactly what you want. All you have to do is select something that’s close.

For example: You may not be able to decide on which faucet you want to use. However, most contractors have books that you can look through to find something appealing. Then, that item can be priced and included in the bid. Then everyone involved will have a better idea of what is on your mind. A price without associated details doesn’t tell anyone anything about what you really want.

If an allowance must be used, then you should at least ask the contractor to include a notation that reflects the highest and lowest priced items in that category. You should always do your best to be aware of the prices of the items stipulated as allowances. If not, there is a good chance you will be shortchanged. Allowances should not be taken lightly.

Keep in mind that you have as much responsibility to a written contract as the contractor does. And when you sign on the dotted line, it would be good to know that there won’t be a series of up-charges that follow.

Remember: The budget always looks much higher at bid time than it does at purchase time.

Make as many selections as possible before beginning the bidding process. The low bidder may be low because of insufficient allowances.

If you must use an allowance in the bid, do plenty of shopping on your own to arrive at an allowance value that is comfortable in your mind and that will cover the cost of what you want (and don’t forget to include taxes, delivery fees, and extra installation costs for more complicated items).

Never be in a rush to get bids – or enter into a contract.

If allowances make up 20 percent or more of your construction contract, then you could be asking for serious budget trouble.