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Old 11-28-2009, 10:39 PM   #1
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Construction Contracts and Allowances


Hi all - new to forum.

We are planning on building a house (actually contracting with a custom builder). We have a first pass bid that comes to around $700K of which $150K are allowances. The builder told us his mark-up is 15% (tough market right now or it would be 20 - 25%). Anyway, the two biggies on the allowance costs are heart pine floors throughout ($35K), and Kitchen cabinets, countertops and appliances ($60K). Also, although not included in the allowances are $55K for the windows. As I understand it, the price quoted to us for the total job include the markup for the materials as well as the labor, although the markup numbers are NOT included in the allowances, but rather are in the rest of the contract. We also understand that if we go over the allowances, there will be additional charges (that would be the material cost+markup) but that if we wind up UNDER the allowance, we would only receive back the material costs.

My questions/observations are as follows:

Wouldn't it be smarter to have the builder set the allowances (and total contract as a result) substantially lower...that way we do not wind up payng 15% for the assumed $60K kitchen, but wind up only putting in a $40K kitchen but still give the builder the 15% of the difference, which would be $3. If we fall exactly on or above the original allowance, all is fair, but if we reduce costs, we are still charged for the difference...that does NOT seem fair.

PRESUMING we can get the builder to agree, wouldn't it be potentially even smarter to have certain allowance items pulled 100% from the contract (with subsequent reduction in overall contract), and then we purchase those items directly and deliver them to the builder? I have a friend who is a retired builder who has offered to use his builder license to purchase some of the items (I wold actuallly be the one paying for them) at the builder discount. so, in the kitchen example, if I use the GC to pay for the $60K kitchen, and then pay him through the contract, it is actually costing me $69K. He then gets a 15% mark-up on the subcontractor for installation. If, on the other hand, I can get the exact same kitchen materials for $60K OUT of the contract, then I wind up paying the 15% exact GC cost for the subcontractor installation only, not on the materials. I am NOT trying to cheat the GC, just trying to get the total cost down to our budget. The GC has already shown us a way to reduce costs by $100K by using cheaper windows, etc. so he is amenable to earning less, I am jsut thinking of proposing a different way to get to that lower number...he will still get his $15%, or roughly $90K, we will just get better quality materials because we will have the 15% that we do not pay him to put into the materials.

We already are planning on pulling the detached garage out of the contract, so that I can act as my own GC - the garage was priced at $100K (two car, two story with an office+bathroom+kitchenette avoe.) All things being equal, I save $15K just by acting as the GC on this, and I have rehabbed several old houses and will be finishing the inside of the garage myself...I figure I can get the garage costs down to around $60K that way.

Is my logic flawed, or what?

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Old 11-28-2009, 10:44 PM   #2
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Construction Contracts and Allowances


You did notice this is just a DIY forum?

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Old 11-28-2009, 10:45 PM   #3
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Construction Contracts and Allowances


This site is geared towards DIY, not contracts or cost estimates
You would need to discuss these details with your Builder
Thank you
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