Allowances- the new Bait and Switch
I warn people in my office about the par ells of price shopping. This industry is like no other and shopping pricing is a lot like looking at online menu’s for restaurant pricing then finding out it was all a-lacarte. You have gotten that dinner check before? Wow! Sticker shock.
I used to get people who would come in with a quote and I would send them back to the builder that gave it to them with a list of all the items that “NEED” to be included in order to get a Certificate of Occupancy and the price would double.
My industry has always been clever though. The new tool of day for Bait and Switch pricing is the allowance. It fools the banks as well as the customers.
It is normal in a construction contract to have a few allowances. Simply put this is a number put in the contract (included in the price) for some items that have not been settled on yet. Let’s say a customer is ready to go to contract but has not picked out the exact appliances they want yet. They have looked enough to know they will likely spend around $3000 but they are hoping to get a holiday sale. We include $3000 in the price and list it as an allowance. If they only end up spending $2500 they get the $500 back or if they go over they pay the balance. Fairly safe.
How would you feel about a price to build your entire house but everything is in as an allowance. Site work, septic, Clearing, Driveway, Foundation, Set cost, Finishes, Taping and painting, siding installation, Garage Construction, porches and decks, heating system, electrical, plumbing everything. Then you go to a bank, get a mortgage for the contracted amount, but when the house is finished you get bills against the allowances for an extra $30,000. Don’t Laugh! it is happening every day now. The good news is your house is all done, the bad news is you don’t get the keys until you pay for the allowance adjustments.
Suddenly the guy who gave you and estimate including everything that was $20,000 higher is not looking so much like he was trying to stick it to you is he?
Why? Well there are two reasons. The first is simply that most of the people in this industry are not builders by trade, and they have no idea how to estimate a project cost. The second is, it is a way to make it look like the price is lower, say everything is included, document that, and still have the price have no solid foundation.
If a contractor allows $8500 for site work or $5000 for finishes, would you know if that was enough? Sounds like a fair number right? So if the site work ends up being $10,500 and the finishes run $7500 they were not “way” off right? But if you go through the entire list the total number is WAY off. On an open ended contract like that, how many times do you think the cost runs under?
My advice to everyone. Do not sign a contract that essentially says you will be required to pay an undefined amount ever. Even if it has a price on the top.