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A201®–2017, General Conditions of the Contract for Construction

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July 28, 2022

What Are Construction Allowances in Contracting? 

In the world of construction contracting, the term “allowance” is frequently used, but what does it really mean? A construction allowance is an estimated amount of money allocated for a specific item or scope of work that cannot be fully determined when a bid or proposal is submitted. This typically occurs when a project’s finish or quality level hasn’t been finalized by the owner, or when variations are expected post-bidding. Allowances serve as placeholders in cost estimates, helping both contractors and owners plan their budgets until the final numbers can be determined. 

The Role of Construction Allowances in AIA Contract Documents 

In the AIA Contract Documents, specifically A201®-2017, General Conditions of the Contract for Construction, Section 3.8 addresses the use of allowances. Here’s an overview of key points from the document: 

• § 3.8.1: The contractor must include all allowances stated in the contract documents within the contract sum. The items covered by these allowances must be supplied for the amounts listed, and by entities or persons directed by the owner—though the contractor is not required to hire those to whom they reasonably object. 

• § 3.8.2: This section outlines how allowances should be handled: 

1. Allowances cover the cost of materials and equipment delivered to the site, including taxes but minus applicable trade discounts. 
2. The contractor’s costs for unloading, handling, installation, labor, overhead, and profit should be included in the contract sum but are not part of the allowance. 
3. If actual costs differ from the allowances, the contract sum will be adjusted through a Change Order to reflect these differences. 

• § 3.8.3: Materials and equipment covered by allowances must be selected by the owner promptly. 

How Allowances Impact Construction Project Budgets 

Construction allowances are crucial during both the bidding and construction phases of a project. Initially, they help estimate the unknown costs, such as the price of materials or equipment that have not yet been selected or fully specified. The contractor includes these allowances in their bid, while the owner makes the final choice regarding the specifics. 

For example, if a contractor is tasked with installing carpet, they can calculate the cost for unloading, handling, installation, and other overhead elements, all of which are included in the contract sum. The only unknown is the cost of the carpet itself, which is covered by the allowance. Once the carpet is purchased, the contractor follows the change order process to adjust the contract sum based on the actual price and any changes in costs incurred. 

Understanding Change Orders Related to Allowances 

When actual costs differ from the allowances, Change Orders are necessary to adjust the contract sum. The Change Order will reflect the difference between the actual cost and the allowance, as well as any adjustments to the contractor’s overhead and profit. For instance, if the carpet costs more than the allowance, the contractor should initiate a change order to revise the contract sum to reflect the increased costs. 

Change orders are an essential part of managing allowances because they ensure that the final contract sum is adjusted to reflect the true costs incurred, keeping the financial aspects of the project transparent and accurate. 

Best Practices for Managing Construction Allowances 

To effectively manage construction allowances: 

1. Be Clear During Bidding: Ensure allowances are properly accounted for in the bid, so there’s no confusion about what’s covered. 
2. Monitor Costs Closely: Track the actual costs for items covered by allowances as the project progresses. 
3. Use Change Orders: If actual costs exceed the allowances, always follow the change order process to adjust the contract sum. 
4. Communicate with the Owner: Keep open communication with the owner to ensure timely decisions are made for items covered by allowances. 

Why Are Construction Allowances Important for Contractors? 

For contractors, allowances play a significant role in managing project costs. They provide flexibility when exact costs cannot be predicted upfront, allowing contractors to submit bids and begin projects with a reasonable estimate for the unknown elements. Allowances also protect contractors from unexpected cost increases by providing a clear process for adjusting the contract sum through change orders. 

By including allowances in the contract sum and tracking costs carefully, contractors can help ensure that their projects stay on budget and that both they and the owner have a clear understanding of costs as they evolve. 

Key Takeaways 

• What is a construction allowance? It’s a set amount allocated in a construction contract to cover items that cannot be fully defined at the time of the bid. 

• How are change orders related to allowances? When actual costs exceed the allowance, a change order is required to adjust the contract sum. 

• Why are allowances important for contractors? They help manage budget uncertainties and ensure the project progresses smoothly despite unknowns. 

FAQs: 

Q1: How does an allowance affect my overall construction budget?
An allowance helps estimate the cost of items that are not yet fully determined. The final cost will be adjusted later based on actual expenses, which may increase or decrease the contract sum. 

Q2: What happens if the cost exceeds the allowance?
If actual costs exceed the allowance, the contractor must submit a change order to adjust the contract sum. The change order will reflect the difference in price and any adjustments in the contractor’s costs. 

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.