Understanding Change Orders and Allowances
Or, How to Compare Apples to Apples
A Change Order is a document that is used to account for any changes to the terms of an original contract.
An Allowance is a tool, which enables us (contractors) to provide pricing on something for which we have incomplete information. The amount provided as an Allowance is an estimate. Usually the information is incomplete due to a decision not having been made. Change Orders are used in conjunction with Allowances to adjust the actual price and/or time allotted for a particular portion of the work covered by the contract.
As an example, a light fixture Allowance is provided for a single light fixture in the amount of $100.00. That is how much has been included in the contract price to cover the cost of the light fixture. If the fixture costs less ($80), the difference ($20) accrues to the customer, and a Change Order is issued, in this case as a reduction in the contract price in the amount of $20.00. If the fixture costs more ($120), then the difference ($20) plus contractors’ overhead and profit (+/-$5) will accrue to the contractor. A Change Order is issued, in this case as an increase to the contract price in the amount of $25.00. The change to the contract is kept clear by virtue of the Change Order process.
It’s important for the customer to understand how Allowances work when comparing proposals. The base costs need to be compared separately from the Allowance costs to get a true comparison. If a proposal has low Allowance costs, this should indicate that the included finishes will be low cost, and/or to meet the level of finish desired, the Change Order amounts may be higher. If a proposal has high Allowance costs, this indicates that there is more room to select a higher level of finish within the stated contract costs. The bottom line is, assuming equal markup percentages, an Allowance item should cost the same in either contract. Don’t be fooled by a lower original contract price if the Allowances are low by comparison. Allowance costs need to be considered carefully and reviewed with the contractor to fully understand what is being proposed. In some cases, it’s best to get a written list that states exactly what is and what is not included for each Allowance item. This way you can be sure of what you’re actually comparing, and/or buying.
When a potential customer is getting competitive bids, and they don’t understand these simple aspects of a contract, an unscrupulous or merely “clever” contractor will use intentionally low Allowance figures to make his proposal appear lower than another proposal. This is the most difficult part of reviewing a proposal. It is our belief that a customer that understands the process will be able to make an informed decision based on the actual value, not necessarily the price indicated in the original contract.