What You Need To Know About Builder Allowances

4Nov 2016
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What are builder allowances? They are in theory amounts of money that builders place in the construction budget for home products that have not been selected by the owner at the time of contract execution. These allowance amounts typically reflects a specified quantity, a specified quality and may or may not reflect the cost of labor to install the items. Product selection allowances are a traditional method of expediting a construction project but often create a great deal of stress and disagreement between builder and client. We will take a look at how to validate and negotiate an allowance amount that will not lead to surprises and last minute disputes when settling contract amounts.

Why Do We Use Allowances
As mentioned, product selection allowances are typically based upon a certain quality and quantity of a products that will be selected to be installed as part of the new project. These product allowances include such items that can not readily be priced with any accuracy due to the variation in pricing of products or materials being used. One of the best examples of a product allowance is home landscaping. In order for the owner to determine the exact cost of landscaping is to select the type and size of the plants and trees. This allowance can also include such items as retaining walls, garden path stones, flower bed boarders and the special fertilizers and soils. As you can see, the landscape allowance would virtually be impossible to accurately price.

How Should Allowances Be Computed
Product allowances are fairly simple in their calculations. The builder should be aware of the prices for quality products that the owner wishes to use in their project. These discussions usually take place at either the design phase or during the specification review stage, when the builder is preparing the construction budget. In the case of a generic product like flooring, it is based upon the square footage of the coverage area multiplied by the unit price of the product, plus the accessories. In the case of more detailed products like appliances, the builder needs to have a better understanding of the range of product quality and budget prices you are interested in. The differences in kitchen appliances can range from $5,000 to $50,000. The same is true for products like cabinets, windows and plumbing fixtures. It is in the owners best interest to get some preliminary product pricing to determine that the acceptable product allowances reflect a fair value for the products you want.

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Is Installation of The Product in the Allowance
This varies greatly with different home builders. This is due to the specifics of the design used for the product and the unknowns of various patterns that can add labor cost to the price of installation. A good example of this is a detailed marble floor design. Although marble can typically be installed at a standard per square foot price, when special pieces and patterns are introduced they will often drive the labor price higher. These kind of situations justly qualify that installation be included in the allowance, especially if the design has not been finalized. The labor cost inclusion should be clearly identified in the notes of the allowances to eliminate future disputes and disagreements.

A Word of Caution
It is very common in a competitive bidding situation for unprofessional builders to manipulate product allowances to get an edge in winning a project award. This is made possible by the overall cost impact on a budget. It is not uncommon for the amount of product allowances to reflect upward of 35% of the total budget. By manipulating the allowance amounts through questionable practices, a bidder can reduce the price up to 10% of the total budget. This can be enough justification for an owner to unknowingly to accept the builders price, only to find out later that the total cost was in fact a greater amount then the other bidders. This is also a good reason that price alone should never be the sole determination of a winning bid.
The product allowances have a significant impact on the overall result on the price of your project and value contribution to your project. It is best that you spend the time asking questions and analyzing the product allowances carefully before you agree to a contract.

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