Construction Allowances: How Do They Work, and Why Do Builders Use Them?

Allowances are a tool that contractors use to allocate construction costs when the details haven’t been specified up front. They might, for example, specify that their turnkey price includes a lighting allowance of $3,000 or a carpeting allowance of $20 per square yard.

Yes, this is a convenient way of pricing things that lets builder and buyer move through the contract process without having to iron out every last detail. But allowances are also one of the main culprits when it comes to over-budget building projects. (Change orders are the other.)

Allowances = variable costs

Here’s the problem with construction allowances: Let’s say you’ve that your contract specifies a $3,000 budget for lighting, but the fixtures that you envisioned when dreaming about your future home end up costing $4k.

What are your options?

Well, if your selections come in over budget, you can either scale back or pay the difference. If you do the former, you may wind up settling for less than you had expected. If you do the latter, the price of you house will grow.

If you go into the process with your eyes open, this doesn’t have to be a problem. You’ll either know that your allowances are big enough, or you’ll at least have a sense for how much extra you’ll need to pay to get the quality you desire, and you can plan accordingly.

Of course, these same concerns apply to things like carpeting, tile, hardwoods, brick, stone work, cabinets, countertops, kitchen appliances, plumbing fixtures, etc. Anywhere you see an allowance, you’re effectively looking at a variable cost masquerading as a fixed cost.

Beware the lowball

Sure, it’s possible that your selections could come in at (or even under) budget. It happens. But it’s important to keep in mind the builder’s motivations when they’re setting your allowances.

Yes, pretty much every builder wants happy customer, but they also want to win your business. One way to reduce the (apparent) cost of your dream home, and make their bid look more attractive, is to lowball the allowances.

So… As with all things, buyer beware. If your allowances look low, be aware that your final price will likely end up being higher than anticipated.

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