How Allowances Really Work

by Julie

Managing Your Money during Building or Remodeling

Allowances are a critical part of managing your money during a home building or remodeling project. Homeowners often get sort of hung up by allowances because they don’t really understand what they are and how they work.  I will attempt to clarify how allowances are used in home building.
When a builder bids a project, most of the cost can be determined from what is shown on the plans and specs.  From the measurements, the builder does a ‘take off’ to determine the material needed.  She knows how much lumber, roofing, tile, plumbing, electrical, etc. is needed to build the house.  Subcontractors also bid their portion of it from the plans.
However, there are some items that a builder has no way of knowing the cost. Those are what a homeowner will choose.  Those prices could be all over the map. Kitchen cabinets, for instance, could range anywhere from $2,000 to over $50,000.  Therefore, an Allowance Schedule is created for those items that an owner will select.  If the owner has shopped ahead of time and obtained price quotes, then real numbers are used.  If that is the case, the Allowance Schedule accurately reflects the final cost.  However, if the owner has not made their selections, then an estimated amount is used.  The builder or architect will guess at the cost of each item which is put on the Allowance Schedule-until the owner actually makes their selection.

An Allowance Schedule looks something like this:

Kitchen Cabinets———-$8,000 (cabinets only)
Plumbing Fixtures——–$3,500 (fixtures only)
Electrical Fixtures——–$3,000 (fixtures, bulbs and dimmers)
Countertops—————$4,000 (material and installation)
Doors———————–$5,000 (prehung door units)
There will be a line item amount for all choices that apply:  windows, hardware, wood flooring, closet shelving, vanities, bath accessories, medicine cabinets, fireplace, shower doors, shower enclosure, mirrors, appliances, tile, exterior covering, roofing, fencing, landscaping and more. The total dollar amount of the Allowance Schedule is included in the overall project cost in a fixed-price contract.
Once the project gets underway, the amounts are adjusted up or down as items are purchased.  If the cabinets cost $7,000, then the owner is given a credit of $1,000.  If the lighting cost $3,800, there is an additional $800 charge.  These show up on Change Orders.

I image that most people are a bit surprised that such an important and large part of a project’s cost is just guessed at.  Maybe owners think that more science is involved?  My clients usually tell me something like “we want mid-level fixtures”.  There is no real mid-level fixture amount.  What is mid-level to one person might be pricey to the next. If I set the allowances, then I look at their house, the type of project and make a guess at the costs to include on the Allowances.  However, I was never right. How could I be?  Clients always surprised me.

On one project, I set bathroom fixtures (tub excluded) at $3,000.  The owners spent $8,000!   The truth is that no one knows, not even the owners, until they shop.  Owners often surprise themselves.  The showrooms are full of absolutely beautiful offerings and owners constantly come back after shopping to say that, maybe, they splurged a bit.  After all, you are building your dream.
For homeowners who want to improve their building experience, they absolutely should make all of their selections ahead of time so that the Allowances reflect real numbers, based on actual quotes.  It is a great way for a homeowner to have a great renovation, home improvement or house building experience.


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