Construction allowances are intended to allow a project to commence without being bogged down by the minutiae of pricing. But the smallest costs can often lead to the largest disputes. Contractors need to be especially careful when drafting contracts with allowances. In part one of this three-part series, a Houston construction lawyer outlined what allowances are. Now, we will discuss the care that must be taken with the inclusion of allowances in your project contracts.
For a contract to be effective, it must take into account the concerns of all involved parties while still prioritizing the overall success of the project. No easy feat. It takes an expert to ensure that contracts are the final word on mitigating and deciding conflicts. For the final word on contract drafting and reviewing, consult the expert Houston construction lawyers at Cotney Law.
Due to the potentially vague nature of allowances, the contract language that applies to them must be as specific as possible. This can be accomplished by including instructions on how rising and lowering material costs should be handled. For example, if costs exceed expectations, the contract should state if they will be added to the next payment or the final payment. If costs are lower, the contract should state how and if they will be deducted from the final amount.
Contractors cover the many costs they incur on a project with a markup to the final billing amount. This markup should be clearly defined in the contract for the owner. When the final amount reflects the rising costs of materials, you must be able to show an owner how you arrived at that amount. Like a grade school math problem, be sure to show your work. An owner may believe that they are being swindled when, in reality, they are being charged fairly for materials and labor.
Contractors and owners must work together to arrive at an allowance amount. Owners must be clear on the quality and amount of the product they want. And it’s up to the contractor to employ the above language and communicate the costs of acquiring and installing products. Only then can an allowance be useful to both parties. However, as we’ll see in the finale of this series, it may be best to avoid allowances altogether.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.