Newbie question on allowances in a fixed price contract build

peter_olmstedNovember 20, 2011

Been reading a lot of books and following this great forum but I still have some newbie questions on how allowances work with in a fixed price contract build.

�Can the contract be written to allow us to shop for our own lighting and plumbing fixtures?

�If so what is the best way to do that?

�If allowed do we buy them and the builder pay us or how does that work.

�If we buy those fixtures how is the labor for installation handled.

�What about warranties?

�What happens if you come in under allowance, I assume that is a savings?

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A lot depends on how your contract is written. In my experience, I can shop on my own. The builder handles installation but will not warranty anything I provide. I can pay out of pocket or they can be included in my mortage (reimbursement or vendor invoice builder). Anything under allowance is a savings.

    Bookmark   November 20, 2011 at 8:36PM
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Yes, you can have the contract state that you want to use the allowance to shop for your own fixtures, or have the allowance placed to something else and pay for the fixtures out of pocket. We did that with our kitchen appliances, the kitchen sink, some light fixtures, and the dimmers in our home. Just talk to your general contractor BEFORE signing the contract about what you desire.

With our current build, we never came in under an allowance, but if we had, then it would have gone towards something else. In fact we moved several allowances around to purchase certain things out of pocket. Ask your GC how they choose to handle installation costs. We purchased several fixtures and all the dimmers ourselves at no upcharge because the allowances quoted to us were for materials only.

Everything we've purchased out of pocket to put into the house is covered by our GC with his regular new build warranty. What we've purchased is either equal or better quality than what he would have provided so he seemed comfortable with that.

    Bookmark   November 20, 2011 at 8:43PM
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Just wanted to say "Thanks" for posting this, poolmy. This very question has been on my mind, as well.

    Bookmark   November 20, 2011 at 8:49PM
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An allowance is a small Cost-of-the-Work contract inside a Fixed Price contract. Of course, that loses the benefit of a fixed price so you should only use an allowance when you have no other choice. Selecting materials and their installation methods and including them in the Fixed Price contract can save you money.

An exception would be kitchen appliances that are normally supplied by the owner and installed by the contractor. Removable equipment should not be in the allowances.

An allowance should not limit you to a particular sub-contractor or supplier unless you agree in advance. You should have the right to reject a sub's proposal or ask that others be considered.

Try to structure the allowances so they are for materials only and installation is in the base contract price. That means you must determine the quantity of the allowance items in the contract even if it is arbitrary. If the quantity can't be determined try to put an installation unit price in the contract.

An allowance clause should state that the final resolution of an allowance is by a Change Order signed by the owner. It should say The Change Order can be 1) an increase in the contract amount equal to the difference between the Allowance amount and the actual final cost, 2) a decrease in the contract amount equal to the difference between the Allowance amount and the actual final cost, or 3) a decrease in the contract amount equal to the entire allowance amount (material supplied by the owner).

Ask the GC to put his OH&P for allowances in the base contract price so that increases and decreases in the allowance amounts will not be increased or decreased by mark-ups.

Warranties vary with the products. Usually there is a warranty from the manufacturer and if you supply the material the warranty will be from the manufacturer to you so keep the paperwork. The installation would be warrantied by the GC often for only a year (check your contract and the laws of your state). A problem arises when a material fails and you have to pay for the removal and reinstallation. However, that will be the case after the GC warranty ends so you are only increasing your risk for that period of time. Unfortunately, really bad products often fail in the first year. So, find out how long that period is and avoid supplying the materials that are unusually expensive to remove and reinstall (like whirlpool tubs, etc.).

    Bookmark   November 21, 2011 at 9:02AM
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If the GC has already included his OH&P for the Allowance items in his base Fixed Price and you supply materials he believes to be well made and properly warrantied, then he might be willing to include those materials in his warranty. However, you will have already paid his markup so the savings would is likely to only be the sub-contractor's markup which you might be paying in the installation price anyway.

The only way to know what you are paying for is to use a Fixed Price contract or a Cost of the Work contract rather than a mixture of the two which is what Allowances are.

If you do use an allowance be sure the price is realistic or at least carry a healthy contingency in your budget for the inevitable cost overruns. GC's often low-ball allowances to make the project more attractive and then charge markups on the increases. It's often a good idea to have the allowances reviewed by the designer assuming he/she is working for you, and to not allow markups on allowance increases as I mentioned earlier.

    Bookmark   November 21, 2011 at 10:06AM
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