I think the behavior you are seeing is correct.
When "allow relocation" is checked it means that the installer will search for an existing copy of the application and replace it there rather than the default install location. It's probably finding the app in its build folder and replacing it there.
This option allows an update to work, even if the user has moved the application since being installed. For example:
1. User installs SomeApp version 1.0 at /Applications/
2. User moves SomeApp to /SomeOtherPlace/
3. User installs SomeApp version 1.1.
With "allow relocation" checked, SomeApp version 1.1 will replace SomeApp version 1.0 at /SomeOtherPlace/.
If "allow relocation" is not checked, SomeApp version 1.1 will be installed to /Applications/, leaving two copies of the app installed (version 1.0 at /SomeOtherPlace/ and version 1.1 at /Applications/).
This is briefly mentioned in the latest docs (not quite by name, which might be why you missed it):
http://developer.apple.com/document...doc/uid/TP40005371-CH1000-DontLinkElementID_8