Allowances And Overhead

elitenw

My wife and I own and run a GC company. We are discussing the issues related to allowances and overhead. We are currently bidding a remodel job for a return customer of ours. In the bid we want to be able to give her the freedom of choosing her electical and plumbing fixtures. Usually we give an allowance in this situation....say $4,000 for elec. fixtures. We figure a price for the work, add our overhead, and then show them the allowance price that does not include the overhead. That way if they spend $3K, they get $1K back to use for other things or just to pocket. This way we still get our overhead on the entire $4K, even if they spend less. Our question has to do if they spend more, do you charge them the extra plus OH, or just the extra? What do you guys do? A little insight into everyones practices would help this family business out. Thanks

Gordo

Personally, we do not like to allowance a project.......the reason being that the HO usually does not know how the allowance works. Sometimes they do not even know what allowance means even after you explain.

Here is what we do in your situation (assuming you do not have the job yet):

1) Cost plus 30% on materials. If the HO does not know what they want yet do not include the materials costs in the estimate.........but do include the labor costs. Let it be known that when the materials selections are made and YOU purchase them that 30% will be added.
If the HO wants to buy the fixtures, let it be known that you will not warrantee them or pick up and deliver. The benefit of this method is that at least the HO will know all the labor costs except for the fixtures costs (which they can control). ALL your OH and P should be wrapped into your labor charges.

Note: We send the HO to our recommended suppliers/sales associates to select fixtures.

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Looks like some pros were here.

Bob Kovacs

Can't have it both ways- if you're only giving them back cost on the deducts, you don't get OH on the overages.....

The key to allowances (for a host of reasons) is to be as realistic as possible with the numbers you give them in the first place. If you do this, you're not going to run thousands over on allowances where missing the OH markup will make a difference. It all comes down to knowing your customer fairly well- if they've been talking about high-end stainless appliances for their new kitchen, you can't give them a $2,000 appliance allowance and then complain about not getting an OH markup when the appliances come in at $18,000. If you had been realistic and given them a $20k allowance, you'd be ahead of the game.

If you're realistic up front with the allowances, you'll find that they'll normally wash out- some will be high, some will be low. And even if they end up running over by a few thousand, does your overhead really change where it would even matter?? People get way too hung up on percentages- if your markup gives you a 10% profit which is $20,000 on a project, who cares if you make $20k on a $180,000 project or $20k on a $182,000 project? In the grand scheme of things, the goal is to make the $20k.........

Bob

elitenw

Wow, I really appreciate the insightful answers. If anyone else has an opinion, let's hear it.