Allowance
A dollar figure carried in the contract for a scope that has not yet been finalized, with a true-up at the time of selection.
Definition
An allowance is a dollar figure carried in the construction contract for a scope of work that has not yet been finalized at the time of bidding. The allowance is the placeholder cost included in the contract sum, with the actual cost trued up against the allowance amount when the scope is selected. If the actual cost is higher than the allowance, the contract sum is increased; if lower, the contract sum is reduced.
Common allowance items include flooring selections, light fixtures, plumbing fixtures, hardware, and signage — scopes where the design has identified the location and quantity but the specific product has not been chosen.
How allowance is used in estimating
In estimating, an allowance is treated as a known dollar figure rather than a takeoff-based price. The estimator reads the allowance amount from the bid documents and includes it in the bid sum. Once the owner selects the actual product, the contractor produces a change order that reflects the difference between the allowance and the real cost (including markup, freight, and installation).
Allowance discipline matters because owners frequently overspend their allowances during construction, generating change orders that grow the contract value. Estimators on owner teams should set allowances at realistic levels rather than artificially low ones that produce a misleadingly attractive bid number. Contractors who suspect an allowance is set too low should flag it during bidding so the owner can budget realistically.
Using allowances effectively
Use allowances when the scope is defined but the specific product has not been chosen. Set allowance amounts at realistic levels based on current market pricing and the expected design level. Document clearly what is included in the allowance (material only, or material plus installation, or material plus installation plus markup). Track allowance reconciliation through executed change orders so the contract sum stays current as selections are made.
Frequently asked questions
Q.What is the difference between an allowance and a contingency?
An allowance is a placeholder for a defined scope (e.g., flooring) at an estimated cost, trued up at selection. A contingency is a reserve for unknown risks across the project. Both carry money in the budget but for different purposes.
Q.How is an allowance set?
Based on current market pricing for the expected level of finish or product. The owner or designer typically sets the allowance based on the project budget. Realistic allowances avoid surprise change orders during construction.
Q.Who controls the allowance?
The owner makes the selection within the allowance. The contractor administers the allowance — purchasing the selected item, tracking actual cost, and generating the reconciling change order.
Q.Are allowances disclosed in the contract?
Yes — allowances are explicit in the contract and the schedule of values. Unlike plug numbers (which are internal to the contractor), allowances are part of the contract terms and are tracked formally.
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