A construction allowance is a price range that has been specified for an item(s) in a sales quote as the actual price will depend on factors which include the decisions made by the client.
Because the exact price cannot be determined, applying an allowance on the stated price informs a reader that the final price would be subject to other factors.
These factors are usually affected by:
- Personal decisions of client
- Material required
- Fluctuating price of materials
- Amount of labour required
- Installation methods needed
- etc
For example, a contractor might have to provide a quotation to a client but the latter has yet to decide on the type of flooring tiles to be used for the balcony area. As the price for different tiles can vary widely, the contractor would have to insert a construction allowance on the itemized balcony flooring so that the quote can be generated and the uncertainty of the pricing of balcony tiles is accounted for.
The customer would then be able to get the quotation to compare with other builders.
An allowance might simply be indicated with the word allowance in brackets beside an itemized list of tasks in a sales quote.
For example it might be listed as:
- Septic system (allowance)
- Lighting (allowance)
- Cabinets (allowance)
- etc
Contractors would practice their own internal operating protocols to indicate allowances in their quotations and contracts.
Construction allowance is essentially required for a couple of reasons.
Firstly, the costs of a particular item cannot be determined at the time of contract preparation. And secondly when decisions regarding the choice of items has yet to be conclusively decided by the client.
Construction allowance is a financial incentive landlords use to attract tenants into renting a space and signing a lease.
Construction allowance in leases
Construction allowance can also be a term used in leases that state a specified financial incentive for renovation works undertaken by a new or existing tenant.
This can be a bonus to induce tenants to sign up to lease a vacant space or to convince existing tenant to renew their lease.
For example, a tenant wants to overhaul the air-conditioning system in an apartment if he or she is to take up a lease. But is unwilling to sign on the dotted line because of the expenses required to fix the aircon. In view of this being a barrier to a deal being done, a landlord might offer a construction allowance to the tenant so that most, if not all, of the expenses would not come out from the tenant’s pocket. After all, new air-conditioning systems would improve the property which is owned by the landlord.
So an allowance might be offered for $3,000 for the tenant to install new aircon fixtures to the property. This could be in a form of rebate from the rental payment.
This can be arranged in a one-off rental rebate, or a monthly $250 cash rebate for one year.
By definition, if the landlord arranges for the aircon to be replaced and pays for it himself, then it is not a construction allowance.
