Allowances – The Financial Black Hole
DEAR TIM: I have just received three quotations for a sizable remodeling project. All of the bids included allowances. What are allowances? What do they include? Is there an easy way to compare them? Help, I'm so confused! H. C.
DEAR H. C.: Be careful! You are about to be pulled into the black hole of bidding! Allowances can easily create confusion. Many homeowners have suffered financial setbacks as a result of this confusion.
Allowances in bid quotations are often used to create a budget number for an item or task which has yet to be defined. It is important to note that the number which is used is often an average or arbitrary number.
Allowances must be carefully spelled out as to what they do and do not include. For example, does an allowance figure include sales tax and delivery charges? How about profit and overhead for the contractor? Special kits or optional items need to addressed. For example, a homeowner may have a $250.00 allowance for a bathtub. However, is the cost of the waste and overflow (drain) assembly part of the allowance or not? It's a good idea to determine if labor costs are a part of an allowance number.
The pricing strategy used in determining the allowance cost of an item can also be a problem area. Builders and contractors often receive special pricing from suppliers when they purchase items. Determine if the allowance number is based upon this price or the retail cost. Often, a homeowner can obtain more competitive pricing if they request that allowances be based upon the contractor's cost of goods. Contractors then include any markup on these materials as a part of their base bid. If they really want your job, they may lower their markup on these items to make their quotation more attractive to you.
Many homeowners have experienced frustration when confronted with allowances. The common cause of this frustration is artificially low allowance numbers. For example, a contractor may quote a kitchen job with a cabinet allowance of $4,000.00. You sign the contract and the job begins. After visiting several cabinet shops, you determine that the lowest quality cabinets cost $7,000. If you don't happen to have any extra money, you have got a major problem.
The best strategy to avoid these problems is to eliminate allowances from your jobs. This is really not that hard to do. The trick is to make product selections before your job goes out for bid. Investing this time during the planning process will reap large rewards. Each contractor will know exactly what you want. He or she will be able to calculate the proper cost and the amount of time required to install the items you have selected. The bids will, in reality, be a comparison of 'apples to apples'.
The preselection of items during the planning stage offers another advantage. Items which need to be special ordered will be identified at the beginning of job. Professional contractors will then be able to order these items in sufficient time so as to minimize project delays.
Allowances can't always be totally eliminated, however. In these cases, make sure that each contractor uses the same arbitrary number and the same conditions in his quotation. This will allow you to more easily determine which contractor is the low, middle, and high bid. Allowing contractors to use their own allowance numbers can create a financial nightmare for you.
