Why Your Contractor's Estimate Isn't the Final Price | #46

Return on Design

This episode of Return on Design explores the often misunderstood concept of construction allowances, revealing how they can lead to budget

Key takeaways

• Allowances are estimates based on past projects and general assumptions, not specific design details.
• Homeowners often assume allowances cover high-end finishes, but the actual cost of desired materials can far exceed the allowance amount.

Main topics

• Construction allowances
• Budget overruns in renovations

Notable quotes

That starting point has a baseline of finish allowances. Yes. So you might think, okay, great. This is the floor plan I want.

Conclusion

Understanding how allowances work—and why they can lead to disappointment—is crucial for anyone planning

Transcript preview

Speaker 1 (0:00) And understanding that there is a very big difference between a design-build firm structure and a general contractor structure. Because you're getting that design first. And that is how builders in new construction specifically can create spec homes that start at a certain point. It's because there's already a substantial amount of design under their belt. So they know what the floor plan is. They know what the electrical layout is. They know what the plumbing layout is. They know... all of these primary, very important pieces to get to that price of $800,000 that it's going to cost with their margin in it. Speaker 2 (0:39) And Speaker 1 (0:39) then the allowances they're deploying for purely aesthetics. Speaker 2 (0:44) Aesthetic or upgrade materials. Speaker 1 (0:47) Welcome to Return on Design, the podcast where beauty meets strategy and interiors become assets that perform. I'm your host, Rachel Niederhofer. designer, investor, and builder of high-impact spaces that deliver real results. Alongside my husband, I run both a design firm and a real estate investment company, where I live at the intersection of creativity and ROI every day. Each week, I'll be unpacking what most people overlook, how strategic design decisions can grow your investment, elevate your lifestyle, and unlock the full potential of your property. You'll get real tools, proven strategies and unfiltered conversations with industry experts who are doing it right. So if you're ready to invest with purpose and leverage design as a powerful tool, this podcast is for you. If you have ever received a builder or a contractor estimate for a project, you've probably seen a section called allowances. This could be cabinet allowance, lighting, appliance, tile allowance. And at first glance, it can seem very reasonable. But once you start the process of making real selections, you... often run into something frustrating, which is, this doesn't actually cover the cost of what I want. Speaker 2 (2:04) Today we're talking about one of the most misunderstood parts of construction budgets, allowances, and why they so often lead to disappointment. Speaker 1 (2:12) Because allowances can make a project look really affordable at first glance, but then you find out later it's not what you thought it was. So Justin, tell me, what are allowances? Speaker 2 (2:23) Allowances are generally just a placeholder estimate budget. They're based off of historicals, off of past jobs, and some generalities of what you're looking for, but they're not specific to what you've got. Speaker 1 (2:35) How are allowances typically established? I mean, I know you said based off of historicals, but let's go a little deeper. Speaker 2 (2:41) I mean, looking at past jobs that have been done, what do typically my cabinets cost? So I have an estimate of what a cabinet costs per foot. You've got 10 feet of cabinets we're going to redo here. That cost times your footage. Speaker 1 (2:59) It's Speaker 2 (2:59) a general rough guess estimate, but it doesn't give you the specifics of material quality or the specifics Speaker 1 (3:07) that come when you actually define a design. So from the perspective and the process of an interior designer, we're going to go through and first establish a very detailed design before we start throwing out. Define numbers of what it's going to cost versus the allowance is basically, to your point, giving an estimate without a design. Speaker 2 (3:33) Exactly. Speaker 1 (3:34) Which is why it can lead to frustration. Because you might show a picture to somebody, a contractor, builder, and say, this is what I want. And they're making an estimation without having that definition. Speaker 2 (3:47) I mean, that goes to... A lot of it goes to just... Again, that average number. Flooring is a great one for specifics. An average range of tile being $2 to $4 a square foot. Speaker 1 (4:00) Yeah. Speaker 2 (4:00) Okay. And you have 2,000 square feet of tile. Speaker 1 (4:04) And this is something you'll see very, very common in new construction too. Speaker 2 (4:10) And Speaker 1 (4:11) finished selections matter. So let's say you decide to go through a building process for... with a new house, new development. That builder is going to give certain allowances for that price point. So you might walk into a show... Not a showroom. Well, it could be a showroom. Speaker 2 (4:30) It could Speaker 1 (4:30) be the Speaker 2 (4:30) showroom. Speaker 1 (4:31) Like a finished house. Speaker 2 (4:32) No, Speaker 1 (4:33) I'm thinking like, if I'm going into a new development as a buyer, and I want to see what does this builder provide, they usually have a house Speaker 2 (4:43) that Speaker 1 (4:44) kind of functions like a showroom. Speaker 2 (4:46) And Speaker 1 (4:46) you can see, oh, this is what I can get. And you'll say, well, how much is this going to cost me? And they'll say, this floor plan starts at maybe $800,000, as an example. And that's the key word you have to pay attention to, is starts at. So that starting point has a baseline of finish allowances. Yes. So you might think, okay, great. This is the floor plan I want. Let's do this lot. And the land may affect it and etc. And now you get into your allowance section. And let's say they've given you, I don't know, $3,000 for plumbing fixtures. And you get to the point of now I want to select my plumbing fixtures. And you start actually shopping. And you realize what $3,000 can get you. And maybe you like more expensive or more luxury finished items. And now instead of $3,000, what you want is going to cost you $8,000. Yeah. Speaker 2 (5:44) And one of the things you have to go back and remember is walking through that model home. Model home. There you go. That's the one you're looking Speaker