What Is an Allowance in Construction? (A Homeowner's Guide)

A construction allowance is a dollar amount built into a remodeling contract as a placeholder for materials or fixtures that have not yet been selected at the time the contract is signed. Instead of pricing a specific tile, fixture, or appliance, the contractor sets aside an estimated amount and adjusts the final cost up or down based on what the homeowner actually chooses.

Allowances are common in remodeling contracts, but they are also one of the most frequent sources of budget overruns, disputes, and homeowner frustration. Understanding exactly how they work before you sign anything can save you thousands of dollars.

Because allowances are almost always set too low. A contractor who wants to win your project has an incentive to keep the headline number attractive. Setting a tile allowance at $3 per square foot sounds reasonable until you visit a tile showroom and realize that everything you actually like costs $8 to $14 per square foot. The difference comes back to you as a change order after you have already signed the contract and committed to the project.

By the time you are picking materials, you are emotionally invested in the project and far less likely to push back on the overage. Contractors who rely heavily on allowances know this.

• Selections are not yet finalized: If you have not chosen your tile, fixtures, or appliances at the time of signing, a placeholder is necessary. The key is whether the allowance amount is realistic.

• Custom or long-lead items: For items with wide price variation and long lead times, an allowance may be the only workable option until selections are confirmed.

• Owner-furnished items: Sometimes homeowners supply their own fixtures or appliances. An allowance can account for the labor to install an item not yet purchased. The problem is not allowances themselves. The problem is allowances that are deliberately set below market rate to make a contract look cheaper than it is.

Yes, in theory. If your tile selection comes in under the allowance amount, you should receive a credit. Make sure your contract explicitly states that unused allowance amounts are credited back to you. Some contracts are vague on this point.

Verify them independently before signing. Take the allowance amounts to a tile store, a plumbing fixture showroom, or an appliance retailer and ask what that budget will actually get you in the quality range you have in mind. If the answer is almost nothing in your category, the allowance is underbudgeted.

• How were these allowance amounts calculated?
• What quality level does this allowance support builder grade, mid-range, or custom?
• If I come in under the allowance, is the difference credited back to me in writing?
• Can we finalize selections before signing so allowances are eliminated?

See also: Scope of Work, Change Order, Defined Scope Pricing, Cost-Plus Contract, Contingency Fund