There are two main reasons:

1. When you install planks there is a requirement that the ends of the plank must be within a certain distance of ends of other planks on adjacent rows. This means you probably cannot make your rows match perfectly even if the planking comes in a variety of sizes. So you will have some cut-off waste and for most planking, especially click lock, you do not want to install small pieces often.

2. There can be defects in the planks. The installer will not know until he is out there. It could be scratched, miscolored, whatever. These will be thrown out.

The extra 5% is to accommodate cut-off waste and any issues with the flooring. For smaller jobs we actually go to 10%. Lowes is probably being nice because it is something they stock or can get easily.

Note: On the question of also paying for installation of the extra 5%.

I am a little perplexed there. I am sure there is some kind of marketing/sales reason to this but I will say - NOT NORMAL. If someone wants 2000 sq ft of hardwood installed. I will charge them for materials including 2100-2200 sq ft of hardwood and 2000 sq ft of labor. I have never heard of charging for the 5% or 10% extra for the install price.

It isn't fishy it is just weird. Any install you have, you have materials left over and clean up. If you want a new door installed on your house there might be 2x4s, trim, shim materials, screws, nails, tons of stuff... I have never heard someone quote me... well I charge for a 36x80 door at about $300 an install plus materials plus a clean up fee based on overages... No. Just weird.

Why wouldn't Lowes just charge you 5% more per sq ft. We aren't talking a lot of money until you start multiplying that across 1000s of installs. If they are charging 2.99 sq/ft why not just 3.15 sq/ft? Probably because they want to keep up with the other big boxes on pricing and 2.99 looks better in an advert. If it is always 3.15 (or higher) why advertise 2.99? Its weird. It is very big boxish.

And just FYI Lowes does almost no vetting for their installers. They send whoever is free out and people bidding on the contract. It's just a random dude. They might (and might is the right word) not send somebody out after tons of negative feedback. But these are just your local installers who do not have enough work on their own - and good installers are usually booked pretty solid and often cheaper than what lowes charges.