I am a home builder who always built and sold spec homes.
I now have a semi-custom home I'll be building for a client.
My question is this, I want to provide good allowances, and know what they should be, but if I give, let's say a 20,000 cabinet/counter allowance and the client only spends 15,000 won't I loose profit on the $5,000 as I'm taking all of my costs and adding a mark-up?
Simple answer? Yes.
The normal and most accepted way allowances are used is as follows in an example of a $300,000 contract price, including a $10,000 appliance allowance.
Appliances come in at $8,000.
Now the contract price is $298,000.
Or, Appliances come in at $12,000.
Now the contract price is $302,000
Read Contractor Allowances – Building Allowances.
However, you are better off building on a fixed fee contract. When you don't tie your profit to a clients purchases, you will sleep better. So will your client.
Believe me, you don't ever want to be accused of coercing a client to buy more of something or a more expensive something. You don't even want to suggest it. When the house ends up costing more than expected (estimated) because the client spent more than the allowance allowed you will be blamed. Been there, done that. Not fun.
If you still want to work on a fixed price or cost plus (mark-up) contract basis, mentally plan your profit on the client not using all their allowance dollars and you won't be disappointed if your profit is less and pleasantly surprised if it is more.
Good luck for a happy build job,