What are material allowances?

When a homeowner is planning a home improvement project, there are a lot of decisions that need to be made. For example: How many kitchen cabinets do they need? What material will the cabinets be made from? Will they be painted or stained? What color will the finish be? Will the cabinets have face frame or frameless construction? Will the doors be overlay or inset? What style doors do they wish to have? What door pulls do they desire?

These are just the decisions that need to be made when they are choosing the cabinets for their kitchen remodel! Once they choose the cabinets, they will still need to choose the countertops, sink, faucet, appliances, backsplash, window trim, wall paint, flooring, lighting, etc.

Every single decision will affect their budget, either positively or negatively. So, all of these decisions will need to be made before they can get accurate pricing from their contractor.

To put it simply, a contractor can’t provide an accurate price quote until he knows whether the cabinetry will cost $15,000 or $50,000. The same holds true for the rest of the products that will be used in the project. 

But, how can a homeowner know if they can afford the project if they have to spend months designing it and choosing all of the materials before they can learn what it will cost?

This is where material allowances come in. 

What is a material allowance?

Material allowances are budget expectations that are created for the items that will be used in a construction project. These budget expectations are used to set a baseline for what a project may cost. Setting this baseline allows the contractor to provide pricing before all of the product selections have been made. 

Instead of asking a homeowner to choose the shower tile before providing pricing for a custom shower, for example, a contractor can set a budget for the tile and offer pricing immediately. By using material allowances, the contractor can say (for example) “as long as the tile you choose doesn’t exceed $1000, this project will cost $10,000 to complete.”

The $1000 cost for the tile in this example is a “tile allowance”. The tile hasn’t been chosen yet, but an allowance has been made for it in the budget. As long as the homeowner doesn’t choose tile that exceeds the cost of the allowance, their project will stay on budget.

When are material allowances used in a construction project?

Material allowances are often used in one of two ways. 

First, they are used to set budget expectations in the planning phase. An architect, designer, or contractor may use material allowances to set a budget expectation for a project early in the design phase. When the allowances are used properly, they can act as a guide for the homeowner as she makes product selections. She can compare the selections she is making to the allowances that were created, and she can see how each decision she makes is going to affect her budget.

The other place allowances can be used is in a price quote. A contractor may wish to have a homeowner sign a contract for a project before all of the material selections are made. By creating material allowances, and using them in the price quote (and the construction contract that follows), the homeowner can receive pricing and agree to the project before they have finalized all of the material selections.

What are the advantages of material allowances in a construction agreement?

One of the greatest advantages of using material allowances in a construction contract is that it allows the contractor to order long lead time items much earlier. As I write this, most kitchen cabinets have a lead time of about 5 months. The idea of spending three months planning their kitchen, only to wait another 5 months for the cabinets to arrive, is not very appealing to most homeowners. 

By using allowances in a construction contract, a homeowner can sign a contract with a remodeling contractor as soon as they have selected the cabinets. The contractor can then order the cabinets immediately, for delivery in 5 months. As they wait for the cabinets to arrive, the homeowner can make the rest of their material selections. This allows the contractor to get started on the project sooner, because he was able to order the long lead time items much earlier.

Another advantage of using allowances in a contract is that it allows the homeowner to get on the contractor’s schedule sooner. Wise contractors have a policy of not adding a project to their schedule until they have a signed agreement. Sometimes time is of the essence for a homeowner and they don’t want to run the risk of someone else signing a contract and getting on the schedule first, so they prefer to sign a contract as soon as possible. Allowances give the contractor an opportunity to provide pricing and a contract before all of the material selections are made, ensuring his ability to reserve the earliest available place in his schedule for the project.

What are the disadvantages of using material allowances in a construction contract?

One disadvantage of having allowances in building contracts is that having the ability to sign a contract early will allow a homeowner and a contractor to “kick the can down the road” in regard to project planning. It is very common for homeowners and contractors alike to procrastinate in making material selections and finalizing the project plans when a contract has already been signed. 

If a project is already on the contractor’s schedule, it is easy to feel like there will be plenty of time to make the necessary design decisions before the work starts. Unfortunately, time passes quickly, and many homeowners who do this find themselves needing to make product selections at the last minute, while the work is already underway. Making decisions in the middle of an active project is ten times more stressful than it should be, so it is something that should be avoided if at all possible.

The biggest disadvantage, in our opinion, of using allowances in a construction contract is that it is easy for an unethical contractor to mislead homeowners by creating unrealistically low allowances in an effort to create a perceived price advantage for his company. 

If a contractor is worried that a homeowner might find his price to be too high, he can offer a low-priced contract that is filled with allowances that are unreasonably low. Most homeowners won’t realize that these allowances are too low until they have already signed the contract and they are choosing the materials. Every product they choose will exceed the allowances that are in the contract and their budget will die a death by a thousand cuts as their contractor presents them with dozens of change orders for their material selections. By the time they are done paying for all the change orders, their project will cost thousands more than they had anticipated!

This is usually less of a problem for people that are looking for a budget friendly, builder-grade project, as low-quality, builder-grade products are generally what these low-cost allowances will be based on.

It is a big problem, though, for people who wish to have high-quality products used in their project, as they might not realize that the allowances in the contract they signed will not cover the high-quality materials they specifically requested! 

In order to avoid these kinds of surprises, please be cautious and do some research on what high-quality materials cost before you agree to a project with material allowances in the agreement.  

Should I sign a contract that has material allowances in it?

Material allowances are neither bad nor good. They are a tool that contractors, designers, and homeowners can use to help set budgets and fast-track project timelines. As with any tool, material allowances can be used properly, with great results, or they can be used improperly, with poor results. 

It is up to you to decide whether you are comfortable using material allowances in your project and if you are comfortable with the allowances that you are presented with. 

At our company, we prefer to avoid using allowances if at all possible, but we can’t ignore the advantages they have in certain situations and for certain projects.

We would advise our readers to carefully weigh the advantages and disadvantages of using material allowances in your project and if using them makes sense, by all means, use them! If, on the other hand, using them doesn’t make sense for you, it is perfectly reasonable for you to reject any agreement that includes material allowances.