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How Do Builder Allowances Work?

Builders Allowances are one of the more confusing parts of the construction contract. Some industry experts will advise you to avoid the use of allowances at all costs and others paint a rosy picture in which you can potentially save tens of thousands of dollars on the cost of your new home.

The truth is somewhere in between. When misused, builder allowances can lead to delays, conflicts and other problems. However, if you know how to use an allowance to your advantage, then you’ll find that it is a great way to save a little money while truly customizing your new home.

What Are Builder Allowances?

Builders allowances are line items in the costs of construction designated for specific items needed, but which are not properly calculated, or that you think you can obtain elsewhere cheaper. Huh? Let’s say that you’re absolutely certain you can find flooring for less money than your builder will charge for it, or perhaps you haven’t quite decided on the style of your kitchen cabinets yet. Allowances let you and your builder proceed with the project despite the fact that the details aren’t completely fleshed out and they haven't been properly priced. An 'allowance' is just set aside to enable you to create a budget before you go choose something.

Essentially, an allowance is a line item in the budget for work completed by yourself or someone other than the General Contractor, or for items that you will supply or choose yourself.

Pros and Cons of Builder Allowances

One advantage to having builder allowances is that you could save money on some things, provided that you can find materials cheaper elsewhere. However, reputable builders generally already know the best places to buy materials, which means that this advantage may not actually be that helpful. However, there are still some other good reasons to ask for an allowance:

  • You’d like to choose details like colors, finishes, light fixtures and more once the home is nearing completion.

  • You want to buy appliances or other products that have been announced, but not yet released for sale to the public.

  • You already own appliances or other fixtures that you’d like to install in your new home.

Allowances can certainly be useful, but they do come with some downsides. Here are some of the largest drawbacks:

  • Scheduling can become a problem. Most builders have worked with their suppliers for a long time, which means they know how far in advance to order and what to do if the order is wrong or damaged in some way. If the materials that you order come in too late or in the wrong size or color, it can cause major delays.

  • If you use an allowance to hire your own subcontractor, you’re forcing your builder to work with an unknown entity. There may be conflicts over the quality of the work or the timeframe in which the subcontractor completes the job.

  • The materials you purchase may cost you a lot more than you expected. Because many builders can buy at wholesale prices, you may find that an allowance for something like windows isn’t enough to cover the retail costs that you’ll need to pay.

The final thing to remember about allowances is that not every builder will budget using allowances. Among those that do set allowances, the number of allowances you can take may be limited. If you’re thinking about requesting an allowance, proceed with caution and make sure that you can deliver the materials your builder needs when he needs them, at a price that you are comfortable paying, and truly within the allowance budgeted.