Builder Allowances

Carl,

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?

Thanks, Jay

Hi Jay,

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,
Carl Heldmann

Home Building Contracts

"Hi Carl,

First, thank you so much. Everything is incredibly helpful.

I have a question on finished goods such as flooring. My contractor has allocated an amount for flooring, but would the installation be part of the flooring cost.

The house is a fixed cost and I will be upgrading flooring and windows. As he allocated $7 per square foot would that include installation? This is based on your calculator.

He has a separate profit margin. If a bid comes under and he does not show it to me should he not allocate the money to other areas such as the finish work?

Hope you can help

Rene"

Hi Rene,

No two home construction contracts are alike, but all contracts should spell out building allowances in detail to avoid conflicts “down the road”.

You’re not even “down the road” and you have a conflict.

If you haven’t signed your contract yet, I recommend that you read my book, read “Home Building-Budget-Allowances”, and sit down with your builder (General Contractor) and “iron out” these questions that you have

Allowances should be indicated as a dollar amount, not per sq. ft., as no two people will measure the square footage of a room, a wall, a floor, or even the house, and come up with the same square footage.

Allowances such as flooring usually have to include labor, otherwise how would the flooring get installed? The same holds true for countertops, appliances, tile, wallpaper, and other decorative items.

Window upgrades don’t include additional framing labor and since framing labor is included in the “building” of the house, there would be no additional charge for labor. If you add a window, you add labor as well as the window.

If you have your allowances spelled out as dollar amounts and you are over or under in one category, the “norm” is that you can adjust the dollar amount in another category allowance to compensate. I would not accept a contract, if I were you, that didn’t have it this way.

Never rush into a home building contract. There are too many things to consider that could become items of contention later.

Have your contract reviewed, if possible, by a good “Real Estate Attorney” BEFORE you sign it.

Leave NOTHING, or as little as possible, to interpretation latter by you or your builder.

The road to hell is paved with bad home building contracts.

It’s not hard to do it right and a really good builder will be sure that his/her building contract is clearly understood and agreed to as he or she probably learned the hard way, as I did, to do it right.

Good luck,
Carl Heldmann, byoh.com

Percentages of Total Home Building Cost

Hi Carl,
I was wondering if there is a percentage of the total home cost that should
be applied it allowances for carpet, kitchen, lighting and so forth.

I thought it would be interesting to have an idea of a percentage breakdown
before hiring a General Contractor.
Can you offer any information or guidance.
I appreciate your time.
Betsy

Hi Betsy,

Below is a quote from Cost Estimating Explained where you will find the rest of your answer:

In the example below, you will notice a (suggested) percentage after each category. These represent typical percentages of a total home building budget. Percentages are NOT “cast in stone”. You may spend less for that category, or you may spend more.

All the cost categories and percentages add up to 100%, so if you spend more than the indicated percentage for one category, you try to spend less in another. It’s up to you as the general Contractor to “shop till you drop” to keep it all in balance. Scroll down and you will see the percentages...continued.
Good luck and thanks for writing,
Carl Heldmann, byoh.com

Home Building Allowances

"If a building allowance is not spent who retains the unused monies, the builder or the home purchaser?
Richard"

Hi Richard,
Nobody retains the unused monies. Allowances are used in new construction or remodeling to allow a General Contractor (Builder) to arrive at a contract bid or total price of a new home....Read the rest
Carl

Builder Allowances - Use Caution

"Should the builder set allowances for flooring, cabinetry, and masonry based
upon the cost/square footage of the home and include labor? Example, a
builder's contract indicates an allowance of $6450 for flooring, but it notes
includes materials and labor.

Thank you,

Anthony"

Hi Anthony,
Your Builder (General Contractor) should provide allowances (labor & materials) for decorative items such as flooring, wall covering, light fixtures, landscaping, etc., and all appliances, plumbing fixtures, etc. See my page, "Home Building-Budget-Allowances".

All allowances should be discussed with your builder before finalizing the contract and only after you have had time to shop and see if the allowances are realistic.

Masonry necessary to actually build the house (not walkways, patios, and driveways) should never be an allowance. The Builder is responsible for building the house as per blueprints (plans) and building it to code.

If he (or she) cannot figure how much it is going to cost for masonry and wants to cover himself by using an allowance for a structural cost, find another builder, or contract the house yourself...Be Your own House (General) Contractor.
Carl Heldmann, byoh.com