How Contractors Can Manage Allowances To Protect Profits
Does this sound familiar?
During the design of the project the clients insisted that a $5.00 per square foot allowance for an “in-stock” kitchen backsplash tile was plenty. During construction they picked out a handmade tile from Spain that sells for $22.00 per foot, takes 5 weeks to get and requires significantly more labor to install than you assumed for the self-spacing stock tiles. The project will be ready for the tile work next week; however the clients finally selected and ordered the above mentioned Spanish tile late last week. The clients insist it won’t be a big deal. “You can keep the project moving. Finish everything except the tile then return when the tile comes in.”
Déjà vu, again?
If the story above sounds familiar, you probably also know the gross profit, scheduling and customer satisfaction implications such a scenario can have on your business. While this provides justification for your mark-up on the direct costs of a project, is it even worth trying to explain all this to your clients? Rather than risk such a conversation, many contractors will simply charge for the difference, eat the mark-up, pay the extra labor cost to the tile sub and hope it never happens again. Surprise, the same problems surface when the clients select the floor coverings!
Problems related to allowances will never go away completely. However, you can implement several strategies to manage their impact and protect your mark-up/margin requirements.
Being proactive is the key
Projects are most profitable and clients are happiest when everything happens as originally planned. Any changes to that plan can cause frustration for either party and may reduce your ability to get referrals if the client sees the changes as your fault. Before allowances throw a monkey wrench into your schedule, help prospects discover what will happen if selections are not made on time, or they choose products that will not be available when needed to keep the project moving as planned. Make sure you do this and mutually agree on things before you allow them to become clients!
Examples of proactive discussion topics:
- If you are remodeling their kitchen or perhaps the only bathroom in the house, will it be a problem if the project is not completed when originally agreed?
- Are they willing accept and to pay for the additional costs related to pulling out of the project and then trying to return later?
- If you do have to leave, how would they feel if you have to finish someone else's project before you return to complete their project?
- Please feel free to add your own in the comments section below
Just talking about these considerations is not enough.
After having proactive conversation with your prospects document their responsibilities in your agreement and what will or will not happen if they do not follow through. Without clear consequences, and understanding the impact of those consequences, prospects become customers who assume they are always right!
Looking for more help with estimating and managing allowances?
Check out the workshop titled: "Estimating, Pricing and Producing Successful Projects".
The workshop is being offered several times at different locations between now and the end of the year. Its also approved for 6 MA CSL Continuing Education Credits if you need to renew your MA Construction Supervisor License.