An allowance can be a useful tool, but in my experience it must be used with caution. A colleague of mine, let’s call him Mark Signature, found this out the hard way. As many of us have learned, he discovered that using an allowance to solve a job cost issue can simply postpone the day of reckoning between what the clients want and what they think they should pay for it.
Mark’s design/build firm, Signature Custom Builders, was approached by a couple we’ll call the Johansens to build their retirement home on a $300,000 lot they’d purchased in an existing subdivision. They’d spent considerable time talking with local architects, designers, and builders so that by the time they met with Signature Custom Builders, they were well informed about local construction costs, building conditions, architectural fees, and the length of time needed to design, bid, and construct a custom home project. “A customer with some experience and savvy!” Mark thought. “What a godsend.”
The Johansens decided to contract with Mark’s design/build firm in order to save on the architectural fee. “Cost,” they declared, “is our primary concern.” They also felt comfortable with him. Mark was experienced, knowledgeable, and seemed to understand their wants, needs, and motivations.
Project discussions started with an anticipated budget and project timetable that ultimately would be reconciled with design fees, permits, and construction costs. The clients went over the size, geometry, detailing, garage needs, and living areas they wanted in their home with the Signature Custom Builders design team. In due course, the design was completed, and Signature finalized the estimate. It was time to sign the construction contract.
The Johansens approved of everything about the design, but now expressed concern about the $985,000 contract price. The all-inclusive price reflected lot conditions, the amount of earthwork and excavation required, and high-end finish specifications. There were no open-ended details, surprises, or allowances. The clients would receive the completed home according to the plans and specifications for the price quoted in the contract.
The clients came back with some questions you may be familiar with: What if the building costs come in under budget? Will you return that amount of money to us? How can we be sure we’re paying a fair price? Does your company mark up every cost from every supplier and subcontractor?
My friend was a little confused by what he thought was a sudden change in the clients’ concern about money. He’d forgotten that early on they’d said their primary driving force was money. “What would you like me to do?” he asked. Mr. Johansen volunteered that he’d talked with qualified individuals in the area who informed him that excavation costs for his lot should be less than the $35,000 to $40,000 in Signature’s contract. “We want you to remove that amount from the contract, along with the sales tax and your corresponding overhead, markup, and profit,” he said. “We’ll subcontract the excavation and pay for it ourselves.” Ding-Ding…Ding-Ding …Battle Stations…This is not a drill! These conditions would have been a deal breaker for me. From experience, I would judge that these clients were actually trying to negotiate the contract price but weren’t sure how to go about it. And this would just be the tip of the iceberg.
Mark was genuinely surprised that this situation could arise at this point in the relationship since the design phase had gone smoothly without any major money issues. “I know there’s a simple solution to their money jitters,” he thought. “Bingo! I’ll use an allowance. The project is saved. Everybody wins!”
This is one area where Mark and I differ. In my home building experience, an allowance is a pseudonym for delaying a decision or putting off a problem.
Signature agreed to a contract allowance of $40,000 for all excavation work. Alas, the excavation contractor encountered rock throughout the site, which quickly eroded the allowance amount. The home was 95% framed when Signature submitted a change order for excavation costs $23,314 over the $40,000 allowance. The Johansens came unglued. A communication breakdown between builder and client ensued and things deteriorated rapidly from there.
