Understanding Allowances

1. Understanding Allowances George Weissgerber

2. Allowances • Agenda • Definitions • Why and when to use Allowances • Keys for Success • Overcoming Resistance • Doing the Math • Summary

3. Definitions • Allowance: An allowance is a specified sum of money set aside for an item about which there is not enough information to establish an accurate price. The specified sum is an educated guess and the actual cost may vary. Once an actual cost is established, owner will be charged or credited any difference through a contract addendum. Allowances as noted, are at THE CONTRACTOR cost plus twenty-five percent (25%).

4. Definitions • Time and Material: If “Time and Materials” work is specified in the contract, or approved in an addendum, labor will be charged at a predetermined hourly rate and materials will be charged at THE CONTRACTOR cost plus fifty percent (50%). Upon completion of the work, the actual costs will be compiled and billed to the Owner through a contract addendum. If T&M work is specified as an allowance, upon completion of the work, the Owner will be charged/credited any difference through a contract addendum.

5. Positives Allows project to commence while decisions are made Research done only after client commits Lower risks for the client and Case Client only pays for what they received. Negatives Production may be delayed from client indecision Final price remains variable until the actual cost of the item is known Allowances

6. When to use Allowances • Allowances can be used to help close a sale when indecision or unknown costs would otherwise delay the sale. • They can also be used when it is desirable to set limits or whenever it is difficult to define an actual scope

7. Keys to Success • The client has to see Allowances as a benefit to him or her. • Allows clients to have choices • Allows for more relaxed decisions • Allows for CPM decisions • Assures clients that they will pay a fair price for what they receive

8. Overcoming Objections • First, be sure you understand what the objection really is. • They don’t like your solution • They don’t understand allowances • They want to control the process • A way for them to avoid saying no face to face

9. Overcoming Objections • Explain why the client is better off with the allowance, (see keys to success). • Explain how the allowance process works from the contract verbiage to the final reconciliation.

10. Understanding the Math • An educated guess “projected total cost”, is what is discussed with the client and input into the estimating system. • This cost is usually entered into CJES using an Allowance “C-note” item, (dollar amount).

11. Understanding the Math • The difference between the estimatedcost and the actual cost, plus 25%, is the final reconciliation charge or credit. • Don’t get all confused by the original actual mark-ups or by looking at anything other then estimated VS actual job costs.

12. Estimated cost Actual cost Difference Plus 25% Billed to client $500.00 $600.00 $100.00 $100.00 x 1.25 $125.00 Example The Contract included an allowance of $625 for the material costs of a new front entry door. This amount was derived from the $500 of estimated costs entered into CJES, marked up 25%. The door actually cost $600 with sales tax.

13. Record Keeping • Your production team must understand what contract items are allowances. • Separate records must be kept for labor and material used to complete an allowance item. • These records must be separated out from other tasks as practical. • Do not wait until the allowance item is completed to compile the records.

14. Close it out ASAP! • Allowances should be closed as soon as you know what the final actual costs “will be”. • Do not wait until the final billing to close out allowances.

15. Summary • Understand why, when and how to use allowances • Be prepared and set the stage • It must be perceived as a “Benefit” in the client’s eyes • Understand how to do the math Control the process!

16. Q & A