Friday April 22, 2016
Allowances in Construction Contracts
If you’re talking to builders about a new custom home you will find that there are many different approaches to the use of allowances in construction contracts. An allowance is a specific dollar amount available to be spent on one construction item. Allowances are commonly used for things like cabinetry and flooring as a way to designate part of the estimated cost to cover items that have not yet been selected. Think of it as a mini-budget for what you can spend on each item in order to stay within your overall project budget.
Allowances may be necessary to get the project moving before the customer is ready to select all the materials they are using in their new home. Used improperly, allowances can turn into a major source of disappointment (or budget overruns) for the customer. That’s why it’s important to understand what the allowances in your contract or proposal will cover.
If you are talking to builders about a new custom home, you will likely find different approaches to the use of allowances in construction contracts. Unscrupulous builders will specify inappropriately low allowance amounts for cabinetry, countertops, flooring, appliances, trim and other items in an attempt to create a winning bid. Unfortunately, the customer quickly learns the choices available within the allowance amounts are not appropriate for the home they envisioned. For example, the allowance may include countertops, but only be sufficient for Formica, when the customer was hoping to use granite or quartz. TIP: if one builder is specifying significantly lower allowance than the others, ask the builder for details about what the allowance will buy. Don’t be afraid to request examples of materials that would fit within the allowance! If you want to make sure that builders’ quotes are comparable, ask all the builders you are considering to quote your home price using the same allowances amounts. Finally, make sure you understand how your builder will mark up spending over the allowance amount. It may be a red flag if the builder applies a higher markup to allowance overages.
Some builders take a much different approach, requiring that all selections be made prior to entering into a construction contract, giving the customer a clear picture of their final cost. Although this approach simplifies things, our experience has been that it is not realistic for most customers to spec out an entire custom home, right down to the doorknobs, before entering into a contract. For many, the evolving home helps to shape selection decisions. You wouldn’t want to have to choose your shoes and earrings before trying on a dress - and you shouldn’t have to make all your finish decisions before seeing your new home starting to take shape.
We think the best approach is for the builder to empower the buyer with information, transparency and choice. There is no substitute for spending upfront time with a prospective client - explaining the cost of items that normally fall under the “allowances” umbrella and explaining the various grades of granite, flooring or cabinetry and the cost impact of each option on the overall project cost. You should also ask to see projects that are underway so they can see how various materials actually appear in the field.
By explaining the pros and cons and being transparent about costs, your builder can give you the tools you need to make smart decisions without feeling rushed. Once you know what the costs are, you’ll feel empowered to make a wise choice without fear of being shortchanged.
Of course, there comes a time in each construction project when choices simply have to be made or the project will be delayed. Builders avoid these situations because they cost money and make scheduling resources much more difficult, especially for builders with many projects running simultaneously. One approach to this problem is to include a selection schedule in your construction contract. A customer-friendly selection schedule provides plenty of time to procure the selected materials efficiently without delaying the house. But it also gives the customer the ability to defer decisions that clearly do not impact the overall duration of construction.
At the end of the day, it all comes down to common sense. If a bid seems too good to be true, it probably is. If a builder won’t show you what your allowance will buy, it’s time to move on. If a builder takes a very inflexible approach to selections, they may doing that for reasons that have nothing to do with what works best for you. Used appropriately, allowances will help get your new home underway sooner and make your home building experience more flexible, transparent and enjoyable.