Allowances in New Home Construction Contracts – The Business Model

Minimum Bottom Line Profit Should Average 9.4%!
For Trades & Subcontractors, at Least 11%
After Income Taxes Are Paid!

In almost every new home construction contract that I reviewed as an accountant, I saw where the contractor would lose several thousand dollars in this area of his business. In every case, the situation was the same, there was no mutual understanding between the home buyer and the contractor. Invariably, the contractor paid out significantly more money than he took in for this part of the contract. What made the situation worse, was that the entire set of transactions were poorly documented and then accounted for incorrectly in the books. All this could have been prevented with four simple steps. First, give more emphasis to this part of the contract to gain a mutual understanding of how allowances are addressed. Secondly, authorize any amenity. Third, properly document the actual transactions and finally, issue a change order and collect the money when the buyer exceeds their allotted allowance. 

This article is designed to help the contractor address the proper procedures and documentation related to allowances in a new home contract. I will first define and describe how allowances should work in a new home contract. Next, I will explain how to address the business perspective in the legal arrangement between the buyer and builder. The third section will cover procedures for dealing with allowances and finally I will explain how a contractor deals with the buyer purchasing more than the allotted amount and of course the corresponding collection process. 

Allowances – Definition and Description 

There are two forms of allowances.

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