Wednesday, May 21, 2014

Allowances, Alternates and Unit Prices

Once a month or so I give a talk to a class of young men and women studying for careers in construction. I usually make a point that wasn’t true 50 years ago but is true now without question. Construction is a heavily regulated industry. Government takes an interest in every construction project, from the moment the contract is signed through final inspection. You could probably cite a dozen examples. I’ll mention just one.

All states set standards for construction contracts, especially residential construction. And among residential jobs, home improvement gets the most scrutiny from government. A prime example: Six states prohibit time and material (“cost plus”) contracts for home improvement work:
·         California -- Business and Professions Code § 7159(d)(5).
·         Illinois -- Compiled Statutes Title 815, § 513/15
·         Massachusetts -- General Laws 142A, § 2(a)(5)ZZ
·         Nevada (residential pools only) -- Administrative Code § 624.6958-2(f)
·         Pennsylvania -- Statutes Title 73, § 517.7(a)(8)
·         Tennessee -- Code Annotated § 62-6-508(a)(5)

That doesn’t make sense to many of the students I counsel. Nearly every home improvement job includes a surprise, something you couldn’t anticipate. “How can I set an exact price before work even starts?” Good question. The answer: You don’t have to – if the contract includes allowances, alternates or unit prices. All three are perfectly legal, even where state law prohibits cost-plus contracts.

Allowances
It's common to leave the final decision on some part of the job to a later date. For example, at the time the contract is signed, the owner may not have picked out finishes such as flooring, appliances or fixtures. The actual cost won’t be known until the owner makes those decisions. So just include in the contract your best guess of the cost. That’s an “allowance.” If what the owner ends up selecting costs more or less than the allowed amount, the contract price adjusts automatically.

Alternates
Many contractors offer alternate quotes when bidding a job. For example, the basic quote might assume an interior wall is a partition and not load-bearing. The alternate might specify an additional cost if a support beam is required for code approval. What gets built and the cost depends on job requirements. Use alternate bids to protect yourself against surprises.

Unit Prices
When the exact scope of the job isn’t known at the outset, price work by the unit. For example, the amount of sheathing or flashing needed may not be known until the roofing tear-off is done. Fine. Write a specific quantity of sheathing and flashing into your contract. Then quote a price per square foot for either more or less than the specified quantity. The price of the job adjusts automatically as requirements change.


One thing has not changed in the last 50 years: If you know what you’re doing, you’ll find a way to get the job done. To see how allowances, alternates and unit pricing fit into your jobs, have a look at Construction Contract Writer. The trial version is free.

2 comments:

  1. This is excellent. I'm preparing for my next architecture license exam NCARB 5.0 and needed a clear definition for these terms.

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  2. Contract alternates, allowances and unit prices create options to be resolved or exercised as late as during construction. Alternates are like an additional bid by the same contractor. The owner can decide which offer to accept. Allowances let the owner make decisions about how some amount will be spent during construction. Unit pricing permits an adjustment in cost to the owner when the exact volume of work isn’t known at the outset. Examples:

    Alternates
    The basic quote might assume a built-up roof. Alternate bids might be based on an elastomeric roof or a tile roof. The project owner decides which alternate bid to accept. Alternate bids give the project owner more control over both the finished product and the cost of the job. It’s perfectly acceptable for the base bid to include the more expensive alternate. In that case, the contract price for lower cost alternates would be a negative amount.

    Allowances
    It's common to leave the final selection of installed finishes or equipment to the discretion of the owner. For example, at the time the contract is signed, it’s likely that no decision has been made on carpets, drapes or decorative light fixtures. If the actual cost of finishes or equipment aren’t known when the contract is signed, include an approximate allowance in the contract. If the actual cost is more or less than the allowance, the contract price will be adjusted accordingly.

    Unit of Work
    It's good practice to include unit prices in the contract when the exact number of units won't be known until work begins. For example, an excavation contract might show a fixed price for the job, assuming 50 cubic yards of rock have been blasted. If the job actually requires more or less than 50 cubic yards of blasting, the contract price will be adjusted up or down based on the payment per unit to work clause.

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