Typically in a custom home project there will be “allowance” items, which usually are budgetary amounts that are preset for certain selection items such as flooring, plumbing fixtures, appliances and the like. For instance, if a builder quotes a $600,000.00 fixed price contract amount to construct your home, and you have a $40,000.00 allowance budget for appliances included in the $600,000.00 price, if you exceed the $40,000.00 budget you may owe the builder more money, since you exceeded the preset budgetary amount for the particular allowance item. If you spend less than $40,000.00 for appliances, you may receive a credit for the difference. The calculation of these embedded budgets can be confusing, and sometimes are a source for conflict and misunderstanding later. Asking the builder for more information, and understanding the process, may reduce the chance of conflict and misunderstanding.
First, make sure that you understand whether the particular allowance budget is a “material only” budget, or whether the amount also includes labor and material costs for the particular item. For instance, if the builder indicates that you have a $15,000.00 tile allowance, make sure that you understand and document whether it is a material only budget, or whether it includes both labor and material. If labor is included in the calculation, depending on the stated number for the allowance you may have a higher probability of exceeding the budgetary amount, and therefore end up in a dispute with a home builder and owe the builder more money.
Next, confirm whether the builder will provide you with source documents, such as subcontractor/supplier invoicing, which substantiate the builder’s calculation of costs in relation to allowance budgets. Your ability to contest or double-check the builder’s calculation may be compromised without seeing these source documents.
Further, ask the builder whether a profit and overhead add-on factor will be included in the calculation of the allowance budgets, and whether this P&O override will also apply if you exceed your budget. If so, request the builder to identify the percentage of P&O add-on, and ask the builder to provide you an example of how this override will be calculated.
Understanding your allowance budgets should make your project go more smoothly!