The Pros & Cons of Builder Allowances

The concept of builder allowances can be confusing to new-home buyers. You may wonder if it’s worth the hassle, or if it will save you money in the long run. While there are certainly both pros and cons to allowances, you need to understand the theory and the risks involved before deciding whether or not to go the allowance route when building a new home.

What is a builder allowance?

Some builders offer buyers allowances on various budget line items tied to the construction of a new home, such as lighting, hardware, or appliances. The amount of the allowance given is deducted from the price of the home, For instance, if a house costs $500,000, but you (the buyer) have access to a wholesale source for appliances and lighting, your contractor might consent to giving you an allowance of, say $7,000, which would be deducted from the sales price of your home. You would then need to decide if you thought you could reasonably purchase the appliances and lighting you want for enough less than the amount of the allowance to make it worth your while.

There are two main types of allowance:

1. Installed allowance

An installed allowance assumes that you are providing not only the excess materials but the labor to install them. Therefore, the contractor will take the lack of workload into account when calculating your allowance. Not all contractors are willing to offer this type of allowance, as they will not wish to assume the responsibility of warrantying the work of trades with whom they have had no prior association.

2. Material allowance

A material allowance means that you provide only the materials, not the work. In other words, you purchase the lighting, but your general contractor is still responsible for seeing that the fixtures are installed. You must remember to keep in close communication with your builder, as most choices affect underlying factors in the home, such as framing to fit around appliances, or reinforcement for a large ceiling fan.

What are the pros and cons of builder allowances?

There are several reasons to consider a builder allowance:

• They enable you to tailor the home’s finishes to your specific taste and requirements, versus being held to a limited number of builder-selected offerings.
• They allow you to purchase items on sale or sometimes at cost, potentially saving you money.
• If you already own certain appliances or fixtures that can be used in your new home, builder allowances save you the money you would have had to spend on those items.

While there are perks to allowances, not all contractors permit them due to the list of cons:

• They can cause scheduling errors. If the items you’ve agreed to provide aren’t delivered on time, or are back-ordered, it can bring the construction process to a screeching halt.
• They can force your contractor to work with trades they don’t know, which could potentially lead to problems on the building site (too many leaders, not enough followers).
• The materials you want to purchase may end up costing more than the allowance you receive.

What should you consider when dealing with builder allowances?

• Generally speaking, it is best to avoid allowances unless you are extremely confident in your ability to procure the agreed-upon items for a cost considerably less than the offered allowance.
• It is important to do your research before requesting any allowances.
• Your contractor should be able to explain exactly how much allowance has been set up for each budget line item.
• Your builder should keep track of how much an allowance cost goes over and under.
• Builder allowances must be realistic.

Although sometimes confusing, builder allowances may be worth exploring. It never hurts to know what your options are as a buyer before the construction process begins.

Sheffield Homes is dedicated to providing homeowners and home builders with outstanding service and quality construction that transcend the mainstream. We serve homeowners in the Denver metro area and northern Colorado. If you have further questions regarding your custom home or the subject of builder allowances, contact us today.