In construction, there are a lot of "known unknowns". It's not always possible to get a cost down to the nitty gritty before a job starts, especially if you've got a scope and design that hasn't been finalized. A contractor has to make an educated guess as to the price of materials and supplies and that 'guesstimated' amount is what is referred to as an allowance.
Construction allowances are a great way to add flexibility and a level of comfort to a project. But it's important to keep an eye on them because the prices of materials and supplies are constantly changing and they may impact your budget more than you expect.
It is also important to ask your contractors about their allowance procedures and how they work. Ideally, you want your contractors to break down the costs of their allowances and explain how that will impact your bid. This will ensure that you know what you are paying for and minimize disagreements. For example, if you have a finish and floor allowance and your builder is budgeting for linoleum and the owner ends up choosing tile floors, it could lead to an unexpected and costly change order. This is why it's so important to insist on seeing a change order for every instance of an allowance being used. This way you can be sure that the changes were accounted for and that the original contract has not been changed to a time and materials contract.