Allowance vs Contingency in Construction: What Each Covers and Who Keeps the Leftover

By Erik Tishenko, Modern Northwest · Published November 4, 2026

An allowance is a set amount in the construction contract for a known item that has not been picked yet, such as flooring, light fixtures or a sign. A contingency is a reserve for problems nobody can see yet, such as rot, buried pipes or a code issue behind a wall. When the allowance item is chosen, the price is adjusted up or down by change order. A contingency is drawn down only when something unexpected happens, and who keeps what is left depends on the contract.

Summarized from AIA A201-2017 Section 3.8 and legal and estimating guides. Your contract controls; a contractor's guide, not legal advice.

Reading a bid with allowances in it? We will explain what each line covers and what it leaves out. Licensed in Oregon (CCB #198582) and registered in Washington (L&I MODERNI888R7). Call (360) 326-2747.

How an allowance works

Allowances let a contractor give you a full price before every finish is chosen. The contract lists each allowance and its amount, and the contractor includes them in the contract sum. When you pick the item, the actual cost is compared with the allowance and the difference becomes a change order: more if you chose up, a credit if you chose down.

The detail that trips owners up is what the allowance number includes. Under the standard AIA general conditions, unless the contract says otherwise, an allowance covers only the cost of the materials and equipment delivered to the site, plus required taxes, less trade discounts. Unloading, handling, labor, installation, overhead and profit are already in the contract price, outside the allowance. So a fixture allowance buys fixtures, not the electrician who hangs them. Contracts can change that, which is why the estimating guides say to state "supply only" or "supply and install" on every allowance line.

The same section says you, the owner, select allowance items with reasonable promptness. Late selections can hold up ordering, and a late order can push the finish date.

How a contingency works

A contingency is money held for things the drawings cannot show. In an existing building that is often concealed conditions: rot, an old slab that is not level, wiring or plumbing that is not where the drawings put it. The standard AIA terms have their own path for concealed conditions that differ materially from the documents: the contractor gives notice within 14 days, the architect investigates, and the price or time can be adjusted. A contingency is the budget that path draws on, so the surprise does not become a crisis. A full budget also splits soft costs and hard costs.

There are two kinds. An owner's contingency is the owner's own reserve for added scope and owner risks, held outside the contract. A contractor's contingency is built into the contractor's price for risks the contractor carries. On cost-plus jobs with a guaranteed maximum price, the contingency sits inside the GMP, unspent amounts typically go back to the owner or are shared, and most disputes are about who can use it and for what. A good contingency clause says how it is accessed, with what paperwork and whose approval.

Three different "allowances" on a tenant build-out

Tenants often run into the word three ways. The tenant improvement allowance is money from the landlord under the lease toward the build-out. A construction allowance is a line inside the contractor's price for an item not yet chosen. And a contingency is the reserve for surprises, which some budgets loosely call an allowance too. Keep them on separate lines in your budget, because each one has different rules about who pays when it runs out.

Setting them up well

• Use allowances for real decisions, not to hide scope that could be drawn now.
• Make each allowance realistic for the quality you actually want, so the change orders are small.
• Spell out what each allowance includes: material only, or material and installation.
• Size the contingency to the building. An older building with unknowns behind the walls needs more room than a new shell. Our office renovation guide covers typical reserves.
• Write down who controls the contingency and what happens to what is left.

More terms are in our commercial construction glossary.

Frequently asked questions

The bottom line

An allowance is a placeholder for a choice you have not made; a contingency is a cushion for a problem nobody has found. Allowances true up by change order, usually for material cost only. Contingencies follow whatever the contract says about access and leftovers, so write that down before work starts.

Our 23,000 square foot Rite Aid to Ace Hardware conversion in Washougal and the 80-unit Cherry Park rehab in Troutdale are the kind of commercial building remodeling jobs where both lines earn their place. Bring us your budget and bids.