our contract addendum was broken out item by item with pricing, so i would have been able to call him out on a huge markup if i knew the price of my door was $X and he was charging $Y.

however, i wanted to just point out that allowances should also be written very specifically. i.e. does your "allowance" account for material only? or material plus tax, delivery, and labor/installation?

i got burned on one allowance item because it wasn't specifically spelled out. luckily it wasn't a total budget buster, but it was annoying because we thought we were really buttoned up during the bidding/contract process.

on the other hand, when you write it into the spec from the beginning, that's your selection, and if you want to change once the process has started, it'll be a lot more costly, whereas with an allowance you likely make your choice closer to when it's needed.

the other thing to consider with allowances is whether your builder still requires you to go through his preferred vendors. an allowance at a high end lighting boutique won't go as far as a generic allowance where you can shop around online for deals.

my feedback is all over the place, but hopefully gives you something to think about.

good luck! long road ahead - try to enjoy it! :)

You might can get a door for 3K, but that doesn't include the sub's labor to install, or the GC markup for arranging purchase, delivery, and storage. That 3K door allowance won't really buy a 3K door. It might buy a 2K door. Unless you are doing a straight cost plus, where everthing is visible and you just pay the 25% overhead on top of that.

And just because Discount Donnies Door Depot is selling the door for 3K doesn't mean that that's the best place to buy the door. Your builder has bis own suppliers that have earned his business through on time delivery, customer support, an being reliable. Donnie may be lower priced, but what if it's crap quality that comes in damaged, and the delays in shipping (and the no return policy) means that it's too late to do anything else but install a crap door if you want to get your CO on time. If your builder purchase your 3K door from his local supplier, and paid 3.5K for it, but it came in damaged, the local supplier would likely lend him a temp door to put in place until the reorder came in. And he'd be he one on the phone with the manufacturer getting it returned instead of taking the builder's time away from the build.

There are reasons that things are done as they are in the construction world, and. It's not always beneficial to you to try to reinvent the wheel.

"There are reasons things are done as they are in the construction world"

Money is the bottom line reason for much of what is done in the business world. Threads like this, asking questions, gives more understanding so both sides make an informed choice.

It is true that there are costs the consumer is not always aware of. It is also true that if consumers don't take the time to understand and take a hand in what they want, in some cases they receive charges that are more than the costs incurred.

Builders are entitled to compensation for their efforts, questions, communication and planning helps assure a fair return for the builder and a happy consumer.

What must be kept in mind is that a major portion of the cost of a house is from subcontractors and material suppliers and the owner doesn't usually see the markup from the subs or suppliers nor does the GC unless a Cost of the Work contract is used and it stipulates that the same type of contract must be used for the subs. I have heard of this but never seen it used.

In a Lump Sum contract the owner bids the project with GC's who are presumably motivated to get the lowest price from subs and suppliers in order to win the contract and therefore the owner has a good idea of the total cost assuming the drawings are well prepared and complete with no allowances. The GC will not make the same OH&P on each item in the Bid and might even lose money on some items so it is not appropriate to think of what you are paying for each item. Your concern in a Lump Sum contract should be the total project cost; buying the pieces of the job out is the GC's concern. Don't be a shopper.

In a Cost Plus contract a GC is selected by capability and perhaps the best fee proposal and provides a Budget for the estimated cost of the work and later usually shows the owner bids from multiple subs but not their markups.

An allowance is a small Cost Plus contract inside of a Lump Sum contract. If the section that describes this sharp deviation from the base contract only establishes a Fee markup, you are likely to be exposed to potential cost overruns with little recourse. If the Allowance section is carefully written the owner can avoid subcontractor and supplier sweetheart deals, kickbacks, uncredited discounts and excessive hidden markups.

- An Allowance should be for material only; the cost of installation and labor should be bid in the base contract.
- When labor and installation are unavoidable in an Allowance it should be in the form of a Unit Cost (per fixture, per s.f., hourly rate, etc.) (The cost of labor for the GC's own forces should also be listed in the contract)
- The owner should have the right to propose or reject subs and suppliers.
- The owner should have the right to cancel a material Allowance, buy the material and have it delivered to the site.
- The Allowance amount in the contract should be required to be treated like any other "change in the work" requiring a written Change Proposal from the GC for the owner's acceptance and later altering the Contact Amount by a written Change Order.

In many cases, it's the builder (not the owner) who prepares the cost of construction, plus overhead and profit. Allowances are typically prepared by the builder as a means of allowing the owner to pick materials/equipment within a designated price range.

When the owner wants to specify specific materials/equipment they have a choice: 1) call out the item for the builder to purchase and install; 2) furnish the item to the builder for installation at builder's expense; 3) purchase and install the item by owner.

Owner provided "allowances" should be specific about purchasing and installation.

Offering homeowner's design options as part of a construction contract is usually part of a design-build contract which raises far more serious issues than how to handle Allowances.

In a Lump sum contract such owner options would be shown as Alternates with prices.

This post was edited by Renovator8 on Thu, Feb 6, 14 at 10:19

Our build was a little different....but I did a lump sum (builder financed) build with allowances for some items. So basically we gave him a deposit and he financed the build. Our contract called out allowances for Lighting/fixtures, Plumbing fixtures, Bushes, and appliances. That allowed us to deal shop for those items. If we spent over the allowance, we had to pay for the overage at the time of purchase. If we underspent, we could transfer that money to a different allowance. That gave us the option of deal shopping to either save money in one place to spend more in another, or to just get the most bang for our buck out of the dollar amount.

This allowed us to shop early and buy as we found deals. We ended up getting a nice selection of higher end fixtures and appliances for a much lower budget. It required me to work out budgets for everything in the beginning and to keep very strict documentation, but worked out really well in the end.

Stuarbc, it is not unusual for owners to buy their own appliances and have them delivered to the site for the GC to install but they are considered "not in contract" instead of being an allowance in order to avoid confusion about who is responsible for the appliances. The same can be the case for fixtures but that is less common because it involves subcontractors.

In your case if the contractor bought the appliances out of the financed contract amount, its possible he would be responsible for the items without getting paid for it unless he added a markup to the cost. I suppose it is also possible that his markup is already in the base contract amount.

Perhaps he sees it as lending you money to buy some of your own materials. I never like it when a GC wears too many hats. Standard contracts are complicated enough without substantially altering them.

This discussion has become confusing with the blurring of the distinctions in the construction contract of:

1. Allowances: For items furnished and installed by contractor, after owner choice; and
2. Owner furnished items: For items purchased and furnished by owner and installed by contractor.

It's important to keep the two categories clearly defined and separate.

As I learn more about allowances it becomes very smoke and mirrors, I can see why people get burned.

The owner may do some online shopping and figure that he can get his plumbing fixtures for $5k. Owner accepts the $5 fixture allowance in the contract, only to learn that he is "forced" to buy the fixtures at the GC's designated showroom. The nice sales associate politely shows you what you can get with your $5k and this is when the shock sets in.

Kind of like getting a $25 gift certificate to a fancy restaurant with no prices on the menu with the stipulation that you pay any overage. Only difference is the owner is actually paying for their allowance (gift certificate).

Only way to avoid this trap is to clarify the option of providing the materials. Alternatively, owner could provide list of materials and ask to see itemized pricing from GCs preferred vendor BEFORE signing any contract. At least the owner would know what they will get with their allowance. Only problem, is many owners don't know the details of what they want up front. The biggest problem is the cabinet allowance. this is one of the biggest ticket categories and most owners have no idea what they can get with this allowance.

Appreciate the great advice, especially from renovator 8.