A typical construction contract, either residential or commercial, is likely to have a total price for the construction work to be performed, and a list of line items which make up of the components of the total price. Line items are different from allowances. A line item should be a number that does not vary as the construction project goes forward. Allowances often vary, either to increase or decrease the construction contract price.
A. Line Items
Line items are usually expressed in round numbers, and are calculated by the contractor for such work as foundation, framing, or roofing. This amount for the line item in a construction contract should be a number that will not vary with the project going forward.
The exception to a line item being fixed would be if the owner initiates a change in the work to be performed, or some other circumstance dictates a change in the cost of that line item.
An owner should be reasonably confident that the line item number will not vary, and that the owner can be assured that the total contract price will not change due to a change in a line item amount.
An Allowance is a budget figure for a material item to be selected by the Owner and to be furnished by either the owner or the contractor, but which shall be installed or provided by the Contractor. The number identified for the allowance item can vary in price depending on the selection made by the Owner.
An amount for labor might be an allowance, but allowances are much more commonly used for material items which have not yet been selected.
An allowance item might be a fixture such as an oven. Final selection of the actual oven to be installed may be deferred until the finish stage of the construction project. At that time, the total contract price will be adjusted up or down to reflect the cost of the actual oven to be purchased and installed by the contractor.
If the allowance item finally selected is more costly than the budget figure for the allowance item, the owner’s obligation to pay the contractor will increase. If the selected item is less costly than the budget figure for the allowance item, the owner’s obligation to pay the Contractor will decrease.
A well-written construction contract will contain both line items to back up the total contract price, and allowances. The contract itself should have language which explains how the allowance process works to allow the owner to understand how allowances differ from line items. This can help owners and contractor avoid disputes when the construction contract price increases due to an allowance item being higher than the budget number used for the allowance.
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