I don't much like allowances, which let homeowners postpone
decisions that really should be made before the project even
breaks ground. After all, those same choices will still have to
be made once construction has started — under pressure,
to keep the schedule on track. But the reality is that some
clients have a lot of trouble selecting finishes — floor
coverings, electrical fixtures, tile, and the like —
before the house has been framed and they can visualize the
interior spaces. And in today's consumer-driven marketplace,
that makes allowances unavoidable.
The biggest headache with allowances is that each of the
parties involved in the project — the owner, the
architect, the designer, the contractor, the suppliers, and the
trades — may have a different understanding of what the
allowance includes and how it gets implemented and paid for.
Consequently, the allowance process is not only frustrating and
inefficient; it's typically a money-loser, too. But it doesn't
have to be that way. Long ago, I learned that I could control
the process with clearly defined procedures. By following these
simple policies, which are described below, I've actually
turned allowances into a profit center for my company.
Limit Allowance Selections
The importance of this rule should be obvious. Homeowners need
to limit their allowance items to a maximum of five selections.
I don't want to start a project with 15 open-ended issues
hanging over me.
Use Only Regular Trade Partners
We limit allowance selections and purchases to approved subs
and suppliers. Experience has taught me that I lose control of
the process when I open the door to "outside" suppliers and
vendors, as they tend to take their direction from the
homeowners rather than following my company's policies and
To understand the problems this can cause, imagine that you've
agreed to let a homeowner select carpet from a supplier you're
unfamiliar with, only to find out that the chosen carpet is
European, available solely in widths of 3 meters (instead of 12
feet), and a special order that won't arrive for 20 weeks. What
is your warranty liability on this product? Can you trust the
vendor's assurance that all seams will "disappear"? Can you
live with that delivery restriction?
Quantify Allowance Choices
All prices quoted are the same ones Dixon Builders pays. I use
these prices in my cost estimating the same way I use
subcontractor quotes, by entering the allowance amount as a
job-cost line item in the initial contract. Overhead and markup
are added to the total of all job costs, not to individual line
items. If the actual cost of any allowance ends up lower than
the quoted cost in the contract, we refund the difference
between the quoted and actual costs. We don't refund overhead,
sales tax, or any part of our markup.
Explain How You'll Handle Variances
We make it clear from the beginning that when homeowners
deviate from the contract and decide to upgrade the allowance
selection, we add a management-processing fee of 28 percent to
the extra cost. If they object to this, I point out that the
upgrade will result in a more expensive finished product that
we'll have to warranty.
I also tell them that if they want to avoid the allowance
overage fees, they shouldn't increase allowance amounts after
signing the contract.
Include an Allowance Summary
Our contracts include an allowance summary sheet (Figure 2).
The summary notes each allowance, along with the dollar amount
and the due date for the decision. The summary is not a
substitute for the details we put in the specifications, but
rather a summation of the allowance plan.
Document All Selections
When an allowance selection is made, I document it in writing
by using a standard change-order form that spells out all the
facts, figures, model numbers, colors, and details of the
allowance (Figure 3). The form acts as a final clarification of
the selection and gives the owner a final chance to review it.
I use this form even when there are no changes to the allowance
amount, because it ensures that we are giving the owners
exactly what they want.
This is also our last chance to resolve any open questions.
Say, for example, that the owners have finalized all their
plumbing fixture and finish selections, but several questions
remain. Maybe they've chosen a dual-basin sink, but haven't yet
specified which basin will receive the disposal. They also may
still need to clarify whether the fixture is drop-in or
undermount, and where they want the soap dispenser. I review
these questions with the owners and note their answers on the
change order as a directive, so that the job superintendent and
plumber know exactly what needs to happen.
The documentation really proves its worth when the owners
insist on choosing products that we recommend against. For
instance, we once did a job where there was a tile allowance
for the mudroom, but when the time came to choose the tile, the
owners decided they wanted laminate flooring instead —
even though the laminate manufacturer advised against
installing the flooring in a wet area. So when we wrote the
allowance settlement change order, we spelled out the potential
problems and noted that we could not warranty the installation.
Six months after they moved in, the owners called my office and
in a stern voice asked me to replace the laminate flooring with
ceramic tile. Without the limitation on the change order, this
definitely would have evolved into a warranty issue that my
company would have been responsible for.
The most solid endorsement I can give for these procedures is
the enthusiasm of my customers. Many of them have had previous
experience with building or remodeling and found allowances to
be a huge source of misunderstanding. They recognize that my
clear-cut policies work better than a haphazard approach, and
they're much more satisfied at the end of the project.
Dennis A. Dixon is a custom builder in Flagstaff, Ariz., and a
regular speaker at JLC Live.
Figure 1. The author creates a separate document for each
allowance that spells out the quality, quantity, and cost of
the selection. The owners have a chance to make adjustments
before signing off, which prevents them from claiming later
that the allowance wasn't what they wanted.
Figure 2. Once the individual allowances have been finalized,
the author creates a summary sheet for the owners to review
before signing the final contract.
Figure 3. When the due date for a product selection arrives,
the author documents each allowance decision with a
change-order form. Although he uses the change order for all
selections, it really earns its keep when the selection varies
from the allowance summary. In this example, the owners chose a
flooring material that was more expensive than the allowance
amount, and that the author couldn't warranty.