Understanding Cost Allowances

Every bid for new home construction comes with an itemized list of estimated costs. You may notice a huge discrepancy in each competitor’s bid. One contractor, for example, may quote you a price for your bathroom fixtures that is thousands of dollars lower than the other contractors who are vying for the contract. When making your final decision, though, don’t take each of these bids at face value. You must take cost allowances into consideration.

What Is a Cost Allowance?
The cost allowance for an item that is part of your construction budget is the amount that the contractor estimates the baseline price could grow during the building process. Whether this actually happens depends on several factors:

• Availability of materials
• Price hikes at supply level
• Possible complications that could arise

Why Do Cost Allowances Matter?
When you are creating the budget for your new home, you want to make sure you don’t run out of money in the middle of the building process. The estimate for your new home construction project may have hundreds of items listed that take a cost allowance into consideration. This can drive up the estimate, but ultimately it works in your favor because it’s a much more realistic picture of what the actual cost of the item may end up being, thus allowing you to budget more accurately.

How Do You Verify Actual Cost?
Don’t take any estimate as the final word. If you see a large price discrepancy among certain items on your list, get a second opinion. Consult with other professionals who specialize in custom cabinetry, bathroom remodeling or flooring to see what they would charge for the same work. If one contractor consistently lowballs the estimate, consider that a red flag that he or she is likely trying to trick you into accepting a bid. It’s better to go with someone who gives you an honest estimate.

Understanding cost allowances helps you read the proposed estimates for your new home construction more accurately. By getting a second opinion, you protect yourself from would-be tricksters.