What to Know About Builder Allowances

When I built my house a dozen years or so ago, the contractor offered “allowances” for materials and products I would be supplying in the builder process.

Among other things, I supplied an upgraded set of windows, another brand of appliances, a super-efficient gas fireplace, automatic garage door openers, and better light fixtures.

Of course, mine was a one-of-a-kind custom home. It also helped that I have one son who’s an architect and another who worked for a major lumber and building materials dealer. And it didn’t hurt that I have been writing about housing and real estate for more than 40 years and know more than a few people in the business.

But the point here is that even when you are buying a production house — a model that is repeated several times in the same community and in the builder’s other properties — you may have the opportunity to purchase your carpeting from other places instead of through your builder or bring your almost-new and much loved restaurant-grade range with you from your old house.

How Do Allowances Work?

If your builder is so inclined, he will offer you what’s called an allowance. A builder allowance is a specified amount for what it would otherwise cost him to provide the product or service. The allowance will be a subtraction from the total contract price. So if you sign up to purchase your house for $325,000 and the builder gives you a $10,000 allowance because you bought your own set of appliances, the final price will be $315,000.

Builder allowances are not to be confused with home upgrades, which you pick from a list of builder-provided choices. For example, this could include a bigger refrigerator or better flooring. Allowances, on the other hand, are credits for a monetary amount that it would have cost the builder if they had provided the item.

There are no hard and fast rules when it comes to allowances. Some builders won’t allow you to provide anything, while others will allow you to provide a limited amount of supplies. If you want to supply too many items, they believe, you might as well hire them as general contractors to erect your now-custom house on a cost-plus basis, the plus being an amount to cover their overhead as well as a profit.

What constitutes a reasonable number of changes depends on the particular builder. So you have to feel yours out to see what their policies are. “We will do our best to work with our buyers,” a Midwestern production builder told me.

There’s no set list of allowances, either. They vary greatly, but among the most frequent are allowances for appliances, light fixtures, and flooring options. And it doesn’t have to be a complete set. People often want to bring their prized dining room chandelier with them, for example. And one family I know of brings their custom-designed front door with them whenever they move.

The Problem with Allowances

Of course, there are good reasons why one builder may not consider allowances, while others will limit them. One is scheduling. If the countertops you purchase elsewhere come in late, that throws the whole construction process. If one item doesn’t show up on the job until two weeks after the installers have moved on, they have to be brought back — and who knows when the installers will be available. These unexpected delays can push back the final walk-through of your new home.

Another frequent problem with builder allowances is that the item you buy is the wrong size, broken, or damaged. Sometimes parts are missing or the product is the wrong color. Say you buy a super-upgraded bathtub for your master bathroom at a discount store in the next county. Now say it arrives and it is too large for the space allotted by the builder. Or maybe it’s so scratched up that it’s unacceptable.

If it’s the wrong size, pipes must be moved to make way for your tub, and that means the plumber and electrician must be called back to the job. If it’s damaged or the wrong color, it must be returned and replaced, which causes delays.

One more potential issue with allowances is the quality of the subcontractor installer. Some of the best builders tend to work with the same sub-contractors over and over, so they know the quality of their work — and they know who they can yell at if there is a problem. The builder’s sub-contractors also move from house to house within the same subdivision, so they sometimes are close by when a problem is discovered and can quickly return to resolve the issue.

Your guy, on the other hand, is an unknown quantity. And if he screws up installing the kitchen cabinets you purchased at the discount store, he’s usually nowhere to be found to make the fixes. The result, of course, is another delay.

And then there’s the problem of theft. The kitchen cabinets you ordered elsewhere are yours, not the builder’s. So if your cabinets sit on the jobsite for a few days, or even overnight, and then disappear, they are your responsibility. The builder’s insurance won’t cover it.

Each Builder is Different

Different builders will price allowances differently, so pay particular attention here. Some will give you a straight dollar-for-dollar discount, but others will only give you a certain percentage of their original cost.

In the first instance, you may get a $10,000 allowance for the $10,000 worth of tiling that your builder is not providing. But in the latter case, you may only get an $8,000 rebate, which is his actual cost. The other $2,000 was for overhead and profit, which he is no longer seeing. And, should you pick a tile that is $2,000 over the allowance, you could be additionally charged $2,000 or more for the builder to install it. And, some builders may charge you for a change order on top of that.

One way to avoid these problems is to make your choices early, so the builder will have the correct specifications and they can be ordered in plenty of time. It is also wise to make sure you understand completely the builder’s pricing policy as it applies to allowances and that it is written into the sales contract. That way, there will be no surprises or misunderstandings. So, don’t be afraid to ask questions.

Finally, be certain you know in advance how much of a credit the builder will allow and whether it covers just the product in question or if it includes an amount for labor, profit and overhead.