Construction Contracting Basics - Allowances

{"version":"0.3.0","atoms":[],"cards":[],"markups":[["a",["href","https:\/\/www.aiacontracts.org\/contract-documents\/25131-general-conditions-of-the-contract-for-construction"]],["i"],["strong"]],"sections":[[1,"p",[[0,[],0,"July 28, 2022"]]],[1,"p",[[0,[],0,"The term \u201callowance\u201d is\ncommonly used in construction contracts. But what exactly does it mean? Generally,\nan allowance is an amount for the cost of items for which a party cannot\ndetermine with certainty when a bid or proposal is submitted. This could occur\nwhere a project\u2019s finish or level of quality have not been finally selected by\nthe owner, or because of variations expected to occur after bidding. Allowances\nare used in cost or budget estimates until a more accurate number can be\nobtained."]]],[1,"p",[[0,[],0,"In AIA Contract Documents "],[0,[0],1,"A201\u00ae- 2017, General Conditions of the Contract for\nConstruction"],[0,[],0,", Section 3.8 addresses\nAllowances. Specifically, the A201 says:"]]],[1,"p",[[0,[1],0,"\u00a7 3.8.1"],[0,[],1," The Contractor shall include in the Contract Sum all\nallowances stated in the Contract Documents. Items covered by allowances shall\nbe supplied for such amounts and by such persons or entities as the Owner may\ndirect, but the Contractor shall not be required to employ persons or entities\nto whom the Contractor has reasonable objection."]]],[1,"p",[[0,[1],0,"\u00a7 3.8.2"],[0,[],1," Unless otherwise\nprovided in the Contract Documents,"]]],[1,"p",[[0,[1],0,".1"],[0,[],1," allowances shall cover the cost to the Contractor of materials and equipment delivered at\nthe site and all required taxes, less applicable trade discounts;"]]],[1,"p",[[0,[1],0,".2"],[0,[],1," Contractor\u2019s costs for unloading and handling\nat the site, labor, installation costs, overhead, profit and other expenses\ncontemplated for stated allowance amounts shall be included in the Contract Sum\nbut not in the allowances; and"]]],[1,"p",[[0,[1],0,".3"],[0,[],1," whenever costs are more than or less than\nallowances, the Contract Sum shall be adjusted accordingly by Change Order. The\namount of the Change Order shall reflect (1) the difference between actual\ncosts and the allowances under Section 3.8.2.1 and (2) changes in Contractor\u2019s\ncosts under Section 3.8.2.2."]]],[1,"p",[[0,[1],0,"\u00a7 3.8.3"],[0,[],1," Materials and\nequipment under an allowance shall be selected by the Owner with reasonable\npromptness."]]],[1,"p",[[0,[],0,"Under the A201, allowances\ncover a contractor\u2019s costs of materials and equipment delivered on-site and all\nrequired taxes, less trade discounts. The contractor\u2019s overhead costs, such as\ncosts for unloading and handling at the site, labor, and installation, are\nexcluded from the allowance, but should be included in the Contract Sum. Under Section\n3.8.2.3, the contractor\u2019s actual cost incurred will be compared to the\nallowance amount. If there is a difference between the actual cost incurred by\nthe contractor and the allowance amount, an adjustment to the Contract Sum will\nbe made. In other words, the allowance is a placeholder for amounts included in\nthe Contract Sum, until the actual costs are incurred by the contractor."]]],[1,"p",[[0,[],0,"In addition to the\nbidding stages of a project, allowances are generally seen during the\nconstruction phase. For example, consider where a contractor\u2019s work includes\ninstallation of carpet. Since this portion of the work is known, the costs for\nunloading, handling, installation and other expenses related to the carpet can\nbe calculated by the contractor as part of its bid or proposal. Given the\nallowance amount, overhead and profit can also be calculated. These elements\nare already included in the Contract Sum. The only unknown is the cost of the\ncarpet itself, and that is the allowance figure. When the carpet is purchased\nfor the project, the contractor should follow the proper change order procedures\nto adjust the Contract Sum. If the carpet costs more than the allowance, the\nContract Sum is then adjusted by change order, which shall reflect the\ndifference in price and changes in the contractor\u2019s costs."]]],[1,"p",[[0,[1,2],2,"AIA Contract Documents has\nprovided this article for general informational purposes only. The information\nprovided is not legal opinion or legal advice and does not create an\nattorney-client relationship of any kind. This article is also not intended to provide\nguidance as to how project parties should interpret their specific contracts or\nresolve contract disputes, as those decisions will need to be made in\nconsultation with legal counsel, insurance counsel, and other professionals,\nand based upon a multitude of factors. "]]]]}