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Avoid Contractor Allowances

Allowances & Tips on Bid and Quotation Comparison

Allowances have created more problems between homeowners and contractors than you can imagine. Often they manifest themselves as financial time bombs that explode in the middle of a project. Sometimes they create enormous heartache when customers find out that the items they would really like to have are 100 to 200 percent over budget.

Allowances are cost items for products or services in a construction project that have yet to be specified or defined. You can compare them to a budget number on a financial forecast. Herein lies the problem with allowances. You 'hope' that you can get what you want for the specified number. Basing financial expectations on 'hope' is a very dangerous thing to do.

However, there are instances when allowances can be used successfully in a project. It requires skill, honesty, and timing on the part of the contractor for allowances to become an asset.

Confusion

Allowances have been known to create vast amounts of confusion when attempting to compare quotations from several different contractors. For example, let's assume that two contractors quote allowances and one specifies the exact item he will use with no price attached to it. You are forced to find out his cost and then perform mathematics to equalize the three different quotations. If you make a mistake, you may end up selecting a contractor who doesn't represent the best value.

Working with allowances also creates another major problem. You can start a job and be unsure of the final quality and cost of the items you intend to use. A contractor may misrepresent (either on purpose or by mistake) what an item or group of items really costs. Unfortunately, you find out after the project has started and possibly open yourself up to disappointment. I have seen it happen in many instances where people have had to settle for a lesser quality item because what they wanted cost too much.

These same people could often have had what they wanted if they had known the true cost in the beginning. They could have either borrowed more money from the bank, or adjusted some other aspect of the project to accommodate the allowance overage.

Dishonesty Factor

Some contractors are notorious for using allowances as an effective selling tool. These contractors attempt to include as many allowances as possible in their quotations. Often, they set artificially low numbers as the allowance figure. This practice almost always ensures that their quotation will show the lowest price. Those individuals who shop for price fall for this ploy virtually every time.

However, reality sets in after the contract has been signed or several days or weeks into the job. At this point it is too late to 'fire' the contractor. He or she knows this. You are then forced to scramble to raise the additional funds to purchase the items you need.

Losing Proposition

Allowances pose another problem that many homeowners overlook. This problem can result in a windfall profit for a builder or subcontractor or create another hidden charge. Here is the problem.

Let's say your architect or your plans call for a whirlpool tub or some other large item to be installed in your project. Whirlpools come in many different sizes and weights. The plumber bidding the job (if he /she has been in the business longer than 90 days) will probably assume that you will wind up selecting the heaviest, most complicated whirlpool made. He will base his/her price on this assumption. If you select a lightweight, easy-to-install whirlpool, what chance do you think that you will receive a rebate? My guess is less than 1 in 10.

In fact, if you are dealing with a bold and extremely dishonest plumber and contractor, you can get double charged! Assume that you do pick the whirlpool that the plumber thought you would. He or she can tell you that they figured on putting in a lightweight, easy one. This person will then tell you that they need more money to install the one you selected. Trust me, I know of instances where this has happened. It is frightening to think that people are this dishonest. To make matters worse, this will happen thousands of times in the upcoming year to homeowners across this nation. Hopefully, it will never happen to you.

Allowances & Changes

Allowances can create another insidious problem. Imagine this scenario. Let's say that you have an allowance for a medicine cabinet. Let's further assume that your contractor is not as organized as he/she should be.

The rough framing proceeds as does the plumbing and electric rough-ins. At this point you begin your search for your medicine cabinet. After visiting the store, you select the jumbo medicine cabinet that has everything. Anyway, after delivering the dimensions to your contractor, he informs you the next day that pipes and wires must be moved to accommodate your choice. Guess who has to pay? It will be you 9 times out of 10, trust me.

Avoiding the Nightmares

How, you might ask, can these problems be avoided? It's simple. Preselect as many items as possible prior to completion of your plans and specifications.

If you are serious about your project and you are going to complete it, you will eventually have to make product selections. It is better to make them at the beginning of the project so that they can be discussed with the architect or project planner. Often certain things will need to be drawn on the plans to indicate how and where the items should be placed.

Also, selection of items before the project begins allows you vast sums of time to observe as your project is being built. You will eliminate all of those hectic last minute shopping trips.

The preselection of items also allows you to identify what items are special order items. This fact will be beneficial to your builder, especially if it is noted in the plans and specifications. A large majority of project delays can be blamed on special order items. Frequently, a homeowner makes a selection three weeks ahead of time before an item is needed on the job, only to find out that the item will take six to eight weeks to arrive! This happens every day somewhere in this great land!

The preselection of items prior to the start of construction allows you to assemble technical information regarding the correct installation of items. If you are interested, you can read this material and watch to make sure that the products are, in fact, being installed correctly. Everyone can make mistakes, including your contractor. You just might catch a mistake one day that otherwise might have gone unnoticed.

The elimination of allowances will provide you with very crisp numbers when your bids are presented. Because each contractor knows exactly what you want, there should be no surprises. In the event that he/she makes a mistake, there is virtually no place for them to manipulate the numbers.

Project delays should be kept to a minimum. Once again, the contractor knows what you want. You effectively place the ownership of the 'delay' problem solely on the shoulders of the contractor. He/she cannot blame you for making slow decisions or picking out a hard-to-get item.

Elimination of allowances also lets you or your contractor construct an accurate time-line regarding the scheduling of the entire project. Because you know exactly what is going to be installed, lead times on ordering, and correct installation times, a simple critical path method chart can be constructed. This chart will permit you and the contractor to accurately predict the completion date of your project.

Time Savers?

Architects and contractors often try to use allowances as 'time savers'. They indicate that projects can be started sooner by having you make selections as the project progresses. This is not always true. Tell me, do you think it is worth $500 to $1,000 to preselect items? One change order can easily cost this amount!

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5 Responses to Avoid Contractor Allowances

  1. Is there a "rule of thumb" as regards the amount (a percent per home value) of allowances? . i.e. if I am building a $400,000 home what percent is applied to - plumbing/fixtures - cabinets - flooring - appliances - lighting. We are building homes in prices ranging from $285,000 to $500,000. I hope my question makes sense. If not call me I have to nail this down. 1-765-977-1689

  2. Good article, thanks. Question:
    Is the the contractor required to provide and install an item that has say a $3000 allowance? Meaning, if I don't chose anything that costs more and don't care what item it is.

    The particulars are that I cant get a well digger to do a well for $3000. So, if I say to the contractor I don't want an upgrade. Is the contractor obligated to provide the well to me for the $3000 allowance? And yes he low-balled us on the allowance!

  3. Thank you so much (Tim?) for this superbly written explanation of what I've been trying to tell my spouse regarding many local contractors' insistence upon using allowances — especially when it comes to getting multiple quotes. Invaluable!

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