Construction Contracts 101: Allowances Explained

Description:
In the realm of construction contracts, understanding the concept of allowances is crucial to ensure transparency and effective project management. 🏗️ In this video, Patrick Robertson breaks down the key elements of allowances, hard costs, and how an allowance is transferred into a defined Hard Cost. Additionally, we'll delve into the change order process, revealing how allowances can be transformed into hard costs within a contract.

Key Points Covered:

1. What are Allowances?
Allowances are budgeted amounts set aside in a construction contract for specific items that are not yet fully defined at the contract's outset. These items may include materials, fixtures, finishes, and other variables that are subject to change or adjustment during the project.

2. Hard Costs:
Hard costs refer to the expenses associated with the actual construction work and materials required to complete the project. They encompass tangible, quantifiable elements like foundation, framing, roofing, plumbing, electrical work, and more.

3. Allownaces and Hard Costs
Allowances are Hard Costs in the construction contract that are undefined. Although they are tangible and required to build the structure, the exact scope or specification of the material is unknown. A budgetary value of what this item might cost is provided as an allowance.

5. Change Order Process: Converting Allowances to Hard Costs
Change orders come into play when a project's scope or requirements change after the initial contract is signed. To convert an allowance into a hard cost through a change order process, several steps are involved:

a) Identification of the specific item covered by the allowance.
b) Detailed specification of the item's requirements, such as brand, model, quantity, quality, and any applicable warranties.
c) Obtaining quotes or estimates from suppliers or subcontractors for the item.
d) The change order is then prepared, outlining the new hard cost for the item.
e)Both parties, the contractor and the client, review and approve the change order before implementation.


Why It Matters:

Understanding allowances and the change order process helps maintain transparency and manage project costs effectively. It is through the change order process that allowances are transferred from a budgetary value to a defined value with a scope of work. This step is contractually required and reduces the potential disputes arising from undefined items.

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Patrick Robertson is the Founder of Momentous Enterprises with a mission to build better communities and create wealth for generations to come.

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