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A large building project requires hundreds of decisions, big and small. Many involve choosing products and materials, especially fixtures and finish materials such as paint, carpeting, tile, bathroom fixtures, cabinets and counters, electrical fixtures, towel racks, toilet paper dispensers, and on and on. Some people find this a delightful challenge; for others it’s a nightmare of too many choices and not enough time.
A well-organized contractor will assign you deadlines for making these decisions, and may provide you with samples and color charts – or at least direct you to retailers with whom they commonly do business.
So allowances are a useful tool to buy you a little time to make final product decisions. But keep them to a minimum. All allowance items should be strictly defined and itemized, not a general category like “landscaping.”
Unknowns in Bid Price
Often, the choices are not known at the time a job is bid, so the contractor puts in an estimate of the cost, called an “allowance.” For example, the fixed-price bid might include material allowances of $6,000 for kitchen cabinets and countertops, $15 per sq. yd., for carpeting, and $5 per sq. ft. for ceramic tile.
If you exceed the allowance, you will be charged the difference. If you are under, you will receive a credit. Most contractors will also add markup to the allowance price as with other materials they purchase. If you are buying the products yourself, they typically do not add markup, but are not responsible for product quality, quantity, and warranty issues — not always a good thing.
If your contractor priced the job, allowing $5,000 for “builder-grade” cabinets and Formica counters, but you had in mind solid cherry and granite, you will probably not be happy to discover that the real cost of cabinets and counters is $15,000. Similarly, carpeting can range from under $10 per yard to over $40. Ceramic tile can range from $1 per sq. ft. at a home center to well over $10 per sq. ft. for high-end products.
Allowances are also sometimes used for unknowns such as well drilling or removal of underground ledge. You will be quoted an estimate based on a best guess, with the actual price based on the depth of the well or cubic feet of ledge removed.
Use Realistic Prices
A conscientious contractor will put in realistic allowances, in line with the quality of construction and overall budget of your project. To prevent unpleasant surprises, do research up front on realistic prices for the products you plan to use.
If you are looking at competing bids, compare the allowance figures – low-balling allowances is an old trick to make a bid look attractive. By all means, avoid using allowances on high-ticket items such as windows. The cost difference between “builder-grade” windows and premium windows can be thousands of dollars for a house or addition. Read more on how to spot Inadequate Allowances.
Materials-Only vs. Materials & Labor
Allowances can be either materials-only or include both materials and labor. For example, if you have not decided between carpeting and hardwood floors, it’s tricky for the contractor to include the labor charge in the original bid, especially if these are installed by subcontractors at a turnkey price. Still, the contractor should be able to provide you with a range for prices for carpeting and a range of prices for hardwood.
For work completed by the contractor’s crew, there is rarely a reason to include labor in the allowance. It costs the same to install oak flooring and or maple flooring. If one product is known to be more expensive to install, the contractor can reserve the right to add a surcharge and should inform you about that ahead of time. However, allowances should never include soft costs such as design, permitting, or other services.
Including labor adds greater uncertainty in the pricing and may essentially turn that portion of the contract into a cost-plus bid, depending on the contract language. Make sure you get a fixed price for the allowance work once you make your selection — not a bill at the end based on the contractor’s expenses (the cost-plus approach).
To reduce risk, its best to limit allowances to materials-only for a specific material or product to be chosen. For example, with ceramic tile, the allowance should cover just the tile you pick, not the labor to install it. The fixed bid should also include the thinset, grout, membranes, and other setting materials. Only the unknown item, the tile itself, should be covered by the allowance. That leaves less uncertainty in the bid.
Whenever possible, eliminate all uncertainty (and all allowances) by making product selections before the bidding process. That way, you will get real prices, not guesstimates.
With regard to well drilling, ledge removal, and other high-ticket items, ask whether the contractor will do the job for a guaranteed price rather than an allowance. You may pay a premium for the security of a fixed price, but it might be worth it to you.
Make sure the allowance procedure is spelled out clearly in the contract. How much will the allowance price be marked up for overhead and profit? Do you need to shop at the supplier provided by the contractor? Will you be getting his discounted price or the retail price. If he gets a discount from the price you are quoted and then marks up the cost again, this is a form or double-dipping. Ask that the allowance be based on the contractor’s cost of goods.
If you select products under the allowance price, will you receive a credit, as you should? And will the credit include any markup (if the allowance prices include markup)?
To protect yourself against unpleasant surprises, it is a good idea to add language to your contract requiring the contractor to notify you about allowance overages ahead of time. For example: “Contractor shall promptly notify Owner in writing, prior to performing the work, of any material choices or other changes in the plans which shall increase the contract price or any allowance price.”
View the Allowances clause in our Model Construction Agreement.
Bottom line. Allowances are a necessary evil. Make sure that the allowances in a contractor’s bid are realistic. To the extent possible, make selections for big-ticket items like doors and windows, kitchen cabinets, and bathroom fixtures before soliciting bids.
See also What’s A Fair Allowance?
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Bob C says
Should Owner Pay Directly For Big-Ticket Items Like Windows?
Should big ticket items like windows and siding be purchased under the homeowner’s name or the contractors? My concern is writing a large deposit check for windows without a direct relationship with the window manufacturer. What happens to the deposit if the purchase is under the contractor,s name and something goes wrong with the relationship with the contractor?
There are pros and cons to owners buying materials under their own name. Contractors may refuse to take responsibility for owner-supplied materials. If they are late, defective, or the wrong size, or quantity, the costs and time involved in making things right will fall to the customer who bought the materials. (Or you may end up with a garage full of unused flooring if you order too much.)
From the contractor’s perspective, if he did not charge markup on the materials and had no control over the ordering process, the materials are not his direct responsibility. This may affect callback and warranty issues. (Some contractors get around the markup issue my just moving the markup elsewhere in the bid.)
On the plus side is your point — if you buy the materials directly, you will still own the $30,000 worth of windows if the job runs off the rails before they are installed. If the contractor paid for them (with your money) you may have trouble getting either the windows or the money back without a fight.
Some contractors are comfortable with owners buying certain items; some aren’t. So it is a good topic of discussion early in the job.
Who pays upfront for high-ticket and special-order items is part of the larger negotiation over the draw schedule, where the contractor wants to get paid before work is started and the owner wants to pay after its completed. Most smaller contractors want the owners to frontload the payment schedule to finance the job out of their pocket. So a contractor may be happy that you are willing to pay out of pocket for the windows. Whichever way you go, make sure that if a job is terminated early, you have enough money left to complete the job with another contractor.
Bottom line: The is some risk in every construction job. The best way to reduce your risk is to select a contractor who is competent and trustworthy
Allowances Way Over Budget & Include Labor & Supplies. Any Recourse?
I am having a custom home built in North Carolina. the builder’s bid came with an allowance of $80,000 to cover cabinets, flooring, shower tile, garage doors, appliances, lighting and plumbing fixtures, and some exterior stone. However, the cabinet dealer was one he suggested and used for all his other projects, which he said was of good quality and reasonably priced. We went with his suggestion but the cabinets ended up $26,700 over his allowance. I shopped for very reasonably priced hardwood and even paid $6000 down to secure a sale price, but still ended up $10,000 over on a $17,250 allowance. A similar story on the floor and shower tile.
When I questioned how $2,000 worth of tile ended up costing $16,000 over the allowance, I was told I was paying for the labor and materials to install the tile and hardwood. This does not seem right to me, I was under the assumption that the allowances covered the materials, and I was staying right at the allowance amount with the exception of the cabinets. I am now $50,000+ over budget. Do I have any recourse? Shouldn’t the builder be paying for labor and supplies as part of his cost?
Money disputes late in the job are often the culmination of poor communication and multiple misunderstandings starting with the bidding process, and a poorly written contract – or no written contract at all. They are relatively easy to avoid up front, but difficult to resolve when you’re deep into a project.
It’s clear that your contract contains too many large allowance items. Allowances can be a useful tool on a fixes-price bid – for specific items that are impractical or impossible to price at the time of the bid. They are best used for materials-only selections, such as flooring, lighting fixtures, or countertops. Too many allowances or inadequate allowances are common causes of cost overruns.
While a useful tool when used sparingly, allowances are often overused, and can be abused — either by intentionally underpricing them to keep a bid unrealistically low or to make up for sloppy or incomplete estimating. Either way, it’s up to the owner to push for a more complete estimate and also to confirm with the contractor – or suppliers – that the allowances are realistic.
It sounds like in your case, the allowances cover both materials and labor, and possibly ancillary supplies such as tile setting materials. This is not the norm. If this was not made clear to you by the builder and is not clearly stated in the contract, then you have a valid claim to contest the charges.
Cost disputes with contractors can be difficult to resolve. You should sit down with the builder, communicate your concerns and try to negotiate a reasonable settlement, which often means a compromise on the contested costs.
If you cannot reach an agreement, you may need to contact a lawyer to explore your options. However, legal proceedings are slow, expensive, and do not guarantee success.
Depending on how far along you are and how much you have paid out, you might want to consider terminating the contract and finding someone else to finish the job. However, that will also take time and does not guarantee that you will save money.
So proceed with caution if you want to get the job done on time and move on with your life. Best of luck!
Must I Use Builder’s Preferred Suppliers?
We received our bid and allowances for our custom home. The allowances add up to $200k with the builder’s preferred suppliers. Is it best practice to take those allowances plus descriptions and get bids from other suppliers with the potential of saving costs? The builder did say we could use the suppliers, but he recommends his. I feel like it’s irresponsible to not price shop the bids and just take the what they give.
Procedures around allowances are not always fully transparent and this can lead to some misunderstandings or even disputes over pricing.
For example, a contractor may send you to one of their preferred suppliers where you are quoted the retail price, but they get a discount. If the contractor marks up the retail price, he is getting a double markup. Aside from discounts, a contractor would naturally prefer to work with a supplier he knows and trusts, and with familiar products and materials. New materials, products, and suppliers add uncertainty and can hurt efficiency.
If you choose your own supplier, your contractor may not get the same (or any) discount compared with the price quoted to you. So there may be less profit for the contractor. He may not have an account with this supplier. If you end up buying the product yourself, you may save money, but the contractor may not take responsibility if there are problems with the product or material. So it’s often best to let the contractor make the purchase.
The cleanest way to handle this is for the allowance to make it clear that the price you pay will be the contractor’s invoice price plus whatever markup is stated in the contract. Shopping around can still be tricky as some suppliers will not reveal to you the contractor’s price. Don’t be afraid to ask the contractor how he determines your cost, what a specific item will cost you, and whether it will exceed the allowance. There should be no pricing surprises when you get the final bill.
Katie C says
Who Should Keep Leftover Allowance Items?
My contract has a flooring allowance. Per the contractor I purchased and paid for 2200 sq of flooring. The contractor installed 1900 sq ft of flooring. I requested he credit me for the entire 2100 sq ft he advised me to purchase. He applied the credit but took the flooring. I feel that I own the flooring as he did not pay for it.
Allowance procedures vary, so it’s always best if they are spelled out in the contract.
In a fixed-price contract, the contractor typically buys and owns the materials and gets to keep any leftovers – even if there are allowances. After all, he paid for them out of the fixed contract price, as adjusted by the allowance. Most contractors leave the homeowner a little extra material such as tile or flooring as a courtesy for future repairs or patchwork.
On a cost-plus (time-and-materials) contract, the owner typically owns the materials and gets to keep any leftovers, as the owners are billed directly for materials in the contract. Also, owner-supplied materials on a fixed-price job belong to the owner, not the contractor.
In your case, it’s a little murky. It sounds like the contractor agreed to supply the materials, based on an allowance, but you ended up buying the materials directly. Furthermore, you relied on the contractor’s measurements, which resulted in a lot of leftover material, more than the typical amount. Since you bought the materials yourself, and relied on the contractor’s measurements, it seems fair to me that you should have the option to keep the extra materials.
When owners buy materials directly, it complicates things. To avoid confusion, some contractors insist on buying all the materials. They add their markup and assume all responsibility for material quality, quantity, and warranties. If there are leftover materials, they belong to the contractor.
Bottom line is that this could go either way. Maybe you could split the leftover material 50/50 so you have some in case its ever needed and he has some to help fill his barn or garage.
Eric Beeson says
Should I Receive Credit For Spending Less Than Allowance?
I am negotiating a home addition and my builder is pushing a few allowances for items listed above. My concern is that some allowances seem way too high and others too low. For example his carpet allowance is $1500 but when we went to his supplier, quotes were $2200 minimum – meaning we’d be on the hook for +$700. On the other hand a garage door allowance was $3000 and the quotes we got from his supplier were $2200.
Would these costs essentially “cancel out” or would we overpay for a door PLUS have to cover the carpet budget? I guess another way of asking – if we are significantly UNDER an allowance, should I get a credit back towards my contract?
Allowances are a best guess, so they are rarely right on target, more often too low than too high.
The short answer is yes, you should absolutely be credited for choosing a product that is less than the allowance, although I’ve seen some contracts where the contractor keeps the markup on the original price under the notion that they have already spent the office, design, and planning time regardless of which item you choose.
The longer answer is that the devil is in the details. Make sure the allowance procedure is spelled out clearly in the contract. If not, ask for clarification and get it in writing.
In particular, find out if the allowance cost includes the contractor’s markup. This is a common cause of confusion with allowances. The cleanest approach is for the allowance cost to reflect the contractor’s actual cost of goods and for any markup to be added at the time of billing, the same way other materials are marked up.
It can get sticky when the supplier will not provide you with the wholesale price charged to the contractor. Then you need to trust that the contractor is charging you fairly — or have him include his invoice at the time of billing as is often done with cost-plus contracts
Contractor Charging for Allowance Items We Paid For
My contractor had us buy some allowance materials for our new build out-of-pocket and said we would be credited at the end. We spent about $20k on cabinets, exterior doors, light fixtures and hardware like knobs, handles, pulls, closet shelves and backsplash. We signed final draw but now they won’t pay us back for all the things we bought. Yes were stupid, and in a hurry to move-in. Can we still sue them? Or does signing the final draw make us unable to fight this.
In a perfect world, the contractor would have issued a deductive change order when you agreed to purchase materials that were allowance items in the contract. The change order would have documented the reduced contract price, and the bank would have modified the draw schedule to reflect the change. Construction loans typically have a maximum that will be paid out, but not a minimum.
In the real world, however, both contractors and homeowners often take shortcuts and fail to document changes to the scope of work or other contract terms. This can lead to “he said, she said” disputes over what, exactly, the parties agreed to. Another related cause of construction disputes is assumptions that are not spelled out in the contract. For example, the owner may say “I assumed” the scope of work included removal of demolition debris while the contractor maintains that this was not included in the contract.
Any type of written documentation, such as emails, is better than simple verbal agreements. In the absence of written documentation, you need to negotiate as best you can. Whether or not you have a strong claim depends largely on what you can document with your written contract, invoices for materials, and other records.
That said, you have the practical problem of getting money back from the contractor – assuming he has already been paid in full. If you still owed the contractor money, you would have some leverage. You lost most of your leverage as soon as the final check cleared at the bank.
You can file complaints with the BBB, your state’s consumer protection agency, and the contractor’s licensing board, which may have some effect. Contacting your state’s consumer protections agency is a good place to start.
The amount contested is probably above the dollar limit of the small claims court, which varies by state. That leaves you with the option of suing. A lawyer (I am not a lawyer) could advise you on the strength of your case as well as well as the costs and steps of civil litigation – think $10K and up. Sometimes a formal “demand letter” from a lawyer or the initial steps of filing a lawsuit can lead to a settlement. Best to view it as a business decision, not a forum on who is right and wrong. Best of luck!
Liz B says
Should I Contest Surprise Bill At End Of Job?
We recently completed a pool construction project at our home, and was surprised to receive a final bill $3000 over what we had expected – supposedly our gas and electric allowance had been exceeded.
I had already paid for that billing milestone months ago. The invoice from the contractor refers to a receipt. Do I have the right to request to view these receipts?
Allowances are often used on fixed-price contracts for cost items that are not known at the time the bid is made. Most commonly these are items that the owner will select, such as flooring or appliances. The allowance can cover materials, labor, or both.
Sometimes allowances are used where hidden conditions or other unknowns make it difficult to provide a fixed cost. For example, a contract might contain an allowance for the removal of buried ledge.
In some cases, allowances are simply a crutch for sloppy estimating. “I’m not sure what this is going to cost, so I’ll just throw in a number and we’ll see.” In my opinion, this is not a legitimate use of an allowance. This essentially converts a portion of the work from fixed-price to cost-plus, an arrangement which puts all the risk of cost overruns onto the owner.
It’s not clear, from your description, why an allowance was used here and what determined the final cost. You certainly have the right to review the receipts in question (as you do in a cost-plus contract). Cost-plus work should be “open-book” showing you actual receipts and disclosing any contractor markup. In a perfect world, the contractor should notify you ASAP that you have exceeded the allowance for a specific item. Some contracts require this.
Cost overruns are a fact of life on construction projects. Who is responsible for the extra costs is not always completely clear from the contract. Waiting until the end of the job and surprising you with a substantial extra charge is unprofessional, but unfortunately not uncommon. Surprise charges at the end of a job are a common source of construction disputes.
At a minimum, the contractor owes you a clear explanation for the cause of the extra charges and how they were calculated. If the contractor cannot justify the extra costs, then you have a right to contest the bill and negotiate a more fair amount. If you cannot reach an agreement, they you may need to contact a lawyer to guide you in how to withhold final payment without exposing yourself to liens or other legal action.
What Are Typical Allowances for New Home?
What allowances I should be looking for from the contractors that are going to bid on building a 2,500 sf new home? How can I tell if the allowances are reasonable?
Allowances are only needed for materials or work items that are not specified at the time of the bid. Some common allowance items are flooring, lighting fixtures, plumbing fixtures, appliances, and kitchen cabinets and/or countertops. Contractors may add other allowances, or exclusions, for issues they are not confident about bidding: excavation of ledge, well drilling, repair of hidden water or insect damage in a remodel.
I have seen situations where contractors simply don’t want to provide a fixed bid for certain portions of the job and, instead, add an allowance or cost-plus provision. This places all risk for cost overruns on the customer for that portion of the work.
Allowances are fine as long as the price used in the bid is realistic. If it is too low, you may experience sticker shock when you make your final product selection. For example if the allowance was for vinyl flooring and you end up choosing ceramic tile. If possible, narrow down your choices as quickly as possible and get actual prices from the supplier who will provide the materials.
Clarify ahead of time whether you will be paying the contractor price or the retail price for each item, and whether the contractor will be marking up the price you are quoted at the showroom. Prices for some products can be pretty squishy as different contractors may get different discounts. This is especially true with items sold by wholesale contractor suppliers for plumbing, electrical, and similar items. Kitchen cabinets may also have substantial contractor discounts.
It’s best to avoid allowances for high-ticket items like cabinets and windows where it’s easy to exceed your allowance by thousands of dollars. Even if you change one or two windows during the job, with a change order, you will have better price control than using an allowance for all windows.
• Limit allowances to materials only, rather than materials and labor.
• Find out if the contractor wants you to shop with specific suppliers.
• Visit the suppliers ahead of time to see if the allowances are realistic.
• Include contract language that requires notification any time you exceed an allowance figure.
• Insist on detailed plans and written specifications so you know exactly what the bid includes and excludes.
• Ask for clarification if anything is unclear.
Best of luck with your new home!