Allowances in a renovation quote: what they mean and how to check

What an allowance is

An allowance is a budget line in a quote for something not yet chosen or priced. Common examples are tile, flooring, light fixtures, faucets, cabinet hardware and appliances.

Sample, Northgate Renovations (synthetic): "Tile allowance: $1,200 (supply only). Plumbing fixtures allowance: $900."

The contractor is saying: "I've put $1,200 in the price for tile. If what you pick costs more, you pay more. If it costs less, you may get a credit." The total on the quote is only as firm as its allowances.

In Australia, the same idea appears under two names:

• Prime cost (PC) item. A fixture or fitting not yet selected, such as a basin or stove. Consumer Affairs Victoria describes it as a fitting included in the contract before the client has chosen the actual item.

• Provisional sum (PS). An estimate for work that cannot be priced exactly at signing, such as excavation. Consumer Affairs Victoria calls it "a reasonable estimate of the cost of carrying out work."

Why allowances cause disputes

Allowances are useful. They let a job start before every choice is made. They also cause many of the surprises on final invoices, for three reasons.

1. They're set too low. A low allowance makes a quote look cheaper. A $600 electrical allowance on a full kitchen can be unrealistic.

2. It's unclear what they cover. Does "$1,200 tile" include installation, grout, trim and waste? Or supply only?

3. Overruns carry markup. Some contracts add a margin on top of any amount over the allowance.

What the rules say in some places

• Victoria. Consumer Affairs Victoria says a builder must include a detailed list of PC and PS items, make a reasonable allowance for the nature and location of the site, and give the client a copy of any invoice or receipt showing the real cost. Its checklist for owners asks you to confirm that PC and PS items have clearly stated, adequate allowances.

• New South Wales. NSW Fair Trading says items chosen after signing, such as a stove or special fittings, are listed as prime cost items, and the builder should allow a price that covers the expected cost.

• US and Canada. Allowances are mostly a matter of contract. There's usually no specific rule, so the wording in your quote matters even more. The FTC advises that any promises about scope and cost be written into the contract.

How to check every allowance

Go through each one and ask five questions.

1. What exactly does it cover? Supply only, or supply and install? Delivery? Waste and trim?

2. Is the amount realistic for what I want? Ask what product the contractor had in mind when setting it. Look up the price of something similar.

3. How are overruns charged? At cost, or at cost plus a markup? What percentage?

4. How are savings credited? If you spend less, do you get the full difference back?

5. When must I choose? Late selections can delay the job and add cost.

Reading an allowance clause

Here is a synthetic clause, then what to look for.

Sample, Harbor Line Builders (synthetic): "Allowances are for material supply only. Amounts exceeding allowances will be charged at cost plus 20%. Unused allowances will be credited at cost."

What this tells you:

• Installation labor is not in the allowance. Check that it is priced elsewhere in the quote.

• If you pick tile costing $1,800 against a $1,200 allowance, you pay $600 plus 20%, so $720 extra.

• If you pick tile costing $1,000, you get $200 back.

Now a weaker version:

Sample, Ridgeline Builders (synthetic): "Fixtures: allowance."

No amount, no scope, no overrun terms. Ask for all three in writing before you sign.

Spotting a quote that leans on allowances

Add up all the allowances and divide by the total. If a large share of the price is allowances, the "fixed" price is mostly a guess. Compare it with a quote that names specific products. One contractor may look cheaper only because it pushed costs into low allowances.

Our guide on how to compare contractor quotes shows how to adjust two quotes so their allowances line up.

Ways to reduce allowance risk

• Choose before you sign. Consumer Affairs Victoria suggests avoiding prime cost items where possible and putting the make, model, color and style of your selections in the contract "so that the building cost is final." It also advises against provisional sums where possible, because they can push the final cost higher.

• Get a product list. Ask the contractor which product each allowance was based on.

• Ask for supplier quotes. For big items like cabinets, a written supplier quote can replace an allowance with a real price.

• Set a cap. Ask for a written limit on how far a provisional sum can rise without your approval.

• Ask for receipts. In Victoria, the builder must give you invoices for PC and PS items. Elsewhere, ask for them in the contract.

When an allowance runs over

1. Ask for the supplier invoice and the calculation.

2. Check the markup against what the contract says.

3. Check that labor was not charged twice, both inside the allowance and as a separate line.

4. Ask for the overrun as a written change order before work continues. See the change-order section of what a contractor quote should include.

Get a second pair of eyes on your quote's allowances

EasyToDecode is launching soon. It will read your quote, list every allowance with its amount and wording, flag allowances without a scope or markup terms, and draft the questions to send your contractor. See how it works or join the waitlist to hear when it opens.