If you’re thinking about building a custom home or starting a new construction project, be assured that at some point in the process you’ll hear the word “allowances” from your builder. As a project owner you need to know what this word means early on and you'll need to know the proper questions to ask your builder or designer to ensure that you fully understand what is included or excluded in your project proposal and what potential unexpected costs you might incur during your project's construction process in the form of allowance reconciliation change orders so that you don't get nickel and dimed.
An allowance is a specific amount of money that is included in your construction budget or schedule of values (SOV) which is allocated to be spent on a specific item or service, the cost of which has not yet been completely defined or specified. For example, you may have a $10,000.00 allowance in your budget for appliances. This means that when you go to the design center you have $10,000.00 allotted in your overall budget to spend on appliances. If you were to select appliances that cost more than the allowance, you’ll be responsible to pay the difference in the form of an allowance reconciliation change order which typically comes with a 20%+ builders markup or change order margin. Different builders will vary on this margin.
You’re probably thinking, “That makes sense, so why is this important?”
Allowances have a very useful purpose in the construction budget and most builders use them to some extent as a framework for a budget. In our opinion, however, they should be used sparingly and with a high level of awareness by both the buyer and the builder to establish design and finish expectations based on historical data for like finished projects. When allowances are used, the project owner should make sure to ask specific questions in order to fully understand what that allowance should cover and the project owner should visit local design showrooms to ensure that the set allowance is adequate for aesthetic and functional expectations. It’s very unfortunate, but many builders use allowances to present an artificially low budget to the client so that they will sign the construction contract, knowing that the client will have overages down the road that they can then markup 20%+ rapidly increasing builders profit margins. We refer to these as the bait-and-switch builders and unfortunately we’re often stuck in market competition with this suspect business practice. In contrast to the bait-and-switch builders, an inexperienced builder may use allowances as a budget place holder for cost items that they haven’t taken the time to properly estimate for accuracy or don’t have enough historical data to reference costs for. In this case just as in the case of the bait-and-switch builders the project owner is left with an inadequate allowance to select finishes which typically leaves the project owner in a state of financial distress and or with an under-finished project and overall disappointing life experience. A good builder should always use their industry knowledge to align your budget with your expectations and if your budget is out of line with your expectations they should then align your expectations with the reality of your budget prior to engaging in contractual agreements.
No, not at all. As mentioned earlier, most builders use allowances in some form or fashion as a framework in budgeting as it’s almost impossible to pre-select every item on a new construction or remodel project. One budget line item where allowances are commonly used is flooring. As an example, a standard flooring materials package may be budgeted at $6 per sq ft which is very reasonable for most new construction projects. An honest and transparent builder will do their best to understand their clients expectations and inform their client of the potential cost overruns due to their aesthetic desires in all allowance areas and will also do the leg work of estimating the possible scenarios for the client at the time of budget analysis to properly balance the budget allowances while having a contingency built into their clients construction financing specifically for this potential cost overrun.
Where allowances can really hurt the project owner are when the builder uses artificially low cost finishes as their standard bid inclusions as a way of winning contracts even though they know that the client is expecting something of a much higher level finish. Take the above scenario of flooring for example; Imagine being a client building a brand new four thousand square foot custom home with expectations of a hardwood floor throughout their new home. Now let's say that their builder sets an allowance for them of $12,000.00 for flooring materials and due to their inexperience in the construction industry the client believes that this fairly large sum is adequate for their flooring allowance based on the conversations they’ve had about their expectations with their builder and they may not necessarily be processing that this allowance sum is only $3 per sq ft for their flooring materials. Now, as a client building a home they can most certainly get a floor for $3 per sq ft and the builder can also be able to justify having this allowance sum in their budget but are they getting the floor that they want? Or is the floor that they are expecting going to be $6 per sq ft and come at an additional cost of $12,000.00 plus the builders change order fee (typically 20%+) ultimately coming to a change order of $14,400.00. Now, imagine that same scenario playing out on the new home build for several allowance items costing an additional $100,000.00. Could you afford a scenario like this on your project?
We’ve seen this a thousand times from bait-and-switch builders where a builder will use allowances for wood flooring, tile, counter tops, cabinetry, light fixtures, appliances and even doors and interior trim. The issues arise after the shell is complete when the clients go to the design center to make final selections for these items and find out that the budgeted allowance will only afford them the lowest product level, or in some cases, the allowance isn’t enough to cover anything without going over the allowance. Not only is this extremely disappointing and frustrating to the client, we’ve even seen this type of budgeting behavior cause the disintegration of the relationship between the builder and the client or even worse, the relationship between spouses and have even seen projects go dead in the water because the project owners are put under such financial distress.
Through our design–build method we do our best to fully understand the needs and wants of our clients in terms of custom finishes and design elements during the design and estimating phase so that they don’t have to upgrade and over extend during the selections process. We obviously have no control over inflation or volatility in the commodities markets but through our design–build process, we’ll discover your needs and wants for every aspect of your home, including your desired finishes, lighting layout, cabinetry design and appliances, ensuring that when we give you your budget for your home, it includes all of the custom details that you were hoping for. Although this process may take a little more time on the front end we find that it saves time and distress on the back end while properly establishing expectations for all parties involved.
To properly estimate unforeseen site conditions for example, we work closely with our geotechnical engineers during the estimating phase to fully understand the possible scenarios for excavation, pilings, dewatering and other subsoil conditions. If there is concern that we may encounter with site conditions which would require additional costs, we will include a contingency in our budget just in case so that the project owner isn’t caught off guard and underfunded from the start.
One of our core values is that we value our long term client relationships and our finished product over the production for profit model. We want to be able to run into our past clients a year after they’ve moved into their finished project and have them be genuinely happy with their experience and the build process that we led them through. A big part of ensuring that our clients are happy clients at the end of the design–build process is being financially transparent and giving them an accurate financial assessment from the start in order to properly assist them in making what could be life altering financial decisions. Through our years of experience we’ve found that though we may not win as many contracts and do as much volume as the bait-and-switch builders taking the time to properly establish budget allowances and build expectations creates for a better overall life experience for us and for our clients.
Do you use allowances, and if so, which items are allowances and which costs are firm?
Do you have a list of standard features and specifications that are included in this price or are you basing these allowances off of historical data for a like finished project?
Can you provide me with images of these projects and references from these project owners for confirmation?
Can you provide me with a list of these specified products including plywood sheathing types, roof underlayment types, etc. Know what you're buying!
For each of these allowance items can you please give me a list of showrooms where I can meet with your sales representative and preview or even potentially preselect finishes before we go into contract so that these allowances can become fixed costs or inflation based costs per proposed selections?
Can you please provide me with the takeoffs necessary to properly select amounts of finishes per room prior to me visiting these design or vendor showrooms to expedite the selection process while providing more accurate cost summaries?
How do you handle budget overages on allowance items? If these are charged in a change order allowance reconciliation what is the builder margin or markup on that change order, and is that margin higher than the margin that’s set in the preliminary budgeting phase or is it the same? (If it's higher perhaps consider padding up your allowances and getting a potential credit to save on margin.)
How do you plan for unforeseen site conditions like excavation and the possibility of a required over-excavation, dewatering, etc.?
In summary, an allowance can be a very useful budgeting tool, if used properly. As a general rule, try to make sure that your builder includes budget numbers that are based on actual proposals from vendors and subcontractors for your specific plans and design selections whenever possible, and avoid non reference-able allowances where possible. Ask the questions above when interviewing builders to decide which builder is best for you. A bait-and-switch builder may look great in regards to numbers on a spreadsheet but turn out to leave you with a horrible finished product and an overall bad life experience. Typically, the more detail and planning that a builder puts into their design and estimating process on the front end, the better life experience you can expect as a client. As a client it is important to understand that it is also your responsibility to not chase the lowest bid builder because as everyone should know by now, you always get what you pay for whether it be in life experience or in the finished product. Building is after all an art form and not all builders are artists.
If you’d like to learn more about our design–build process in St. Petersburg, or Tampa Florida inquire here.