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.
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.
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.
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.