The Construction Budget Trap: Allowances | Ep. 49

So with allowances, this is something that is universal across all contractors.

If you ask any contractor what the term allowance is, they'll know.

And the way that this shows up and when it shows up in your project is typically before any construction begins.

So we'll go high level, the whole process of building a custom home.

You've got an architect, you're working through all the fun planning and design, and then you get to the stage where you need to figure out, "What the heck is this going to cost me to build?" Now, uh, when going through our process, we like to have multiple rounds of pricing, even in the design development stage when we're just talking about exteriors.

But at some point, you will have a bid or a breakdown or pricing from your contractor, or proposed contractor, on what the project's gonna cost.

And the way that this evolves over time is when you first have those conversations, you probably hear something about, like, a cost per square foot.

That cost per square foot number, you can typically just take that and put it in the trash.

[laughs] Because what is it relevant to? I often say if you get a cost per square foot number, just anticipate that it's gonna be higher than that.

Because if you're asking a conventional builder what is it going to cost to build a 2,000 or 4,000 square foot home and they're gonna give you a cost per square foot, it's likely that that cost is anchored to baseline, to, like, minimum code requirements or to what their tried and true standard requirements are for a project.

It's not taking into consideration what you want for your project.

So you're gonna start somewhere with a cost per square foot.

Okay.

Well, we need to get to the stage of bidding where you are actually getting, like, line items, you know how much framing costs, how much your foundation, like, how much everything is going to cost in your project line by line, so that you have a very clear picture of what's included, what's excluded.

That's the whole premise of getting a line item bid, so that there's clarity.

It's okay if a lot of things are excluded.

You just need to know about it.

Something we'll often see is excluded appliances.

Okay, you know that you are then gonna be tasked with purchasing and securing appliances, um, or the design team is procuring certain materials.

On your bid breakdown from your contractor, you're gonna have line items, you're gonna have costs, you're going to have more detail.

But depending on the stage that you get that bid from your contractor, they may not have all of the information.

They may not know what your design team is selecting for tile or, uh, they may not know what the appliances are, or they may not even know what the window package is going to be.

If you are getting a price breakdown from your contractor and the contractor does not have all of the information necessary, something that they might do is put a placeholder and give you an allowance.

An allowance is, as the name implies, it is a numerical amount that you are allocated to spend for that particular line item.

So you might have an allowance for tile, and that might be $15 a square foot for tile.