Builder Contracts | Things to Think About
When you decide to build a custom home, many things can run through your mind. How do I find a Builder I can trust? How much am I going to spend building my dream home? What kind of things do I need to know about building my home? How long will construction take on my home? Probably, the most important question that runs through your mind is: Will my home end up costing more than the price agreed upon? This is the question I would like to address today.
Most Builders approach a construction contract in two ways: Fixed Cost- or Cost-Plus contracts. Each of these approaches puts the Builder in control of pricing. Let’s first discuss what a Fixed Cost Contract is. A Fixed Cost Contract is basically a way of saying "I believe your home will cost no more than “X” amount of dollars, but if materials go up, labor goes up or the time it takes to build goes up, then the price of your home will go up and you are responsible for the increase." A Fixed Cost Contract allows the builder to bill the consumer for overages during construction that result from areas not covered under any kind of price cap. Usually these items are laid out in a General Specifications sheet and in their contract. Most builders give allowances on items associated with construction. These allowances can be given on items such as slab construction and framing materials to owner choices in lighting and fixtures.
A Cost-Plus contract is a contract based on what the Builder "thinks" the home will cost. In a Cost-Plus Contract you pay the actual cost for materials and labor and then pay the builder a set percentage of the total cost as a fee for his services. This type of contract allows a builder to skirt sticking to an actual quoted price. It is not uncommon for the cost associated with a Cost-Plus contract to increase quickly. This contract is usually lower than a Fixed Price contract but, is the riskier of the two.
While each of these contracts truly leaves you, the consumer, holding the bag on cost increases, a Fixed Cost contract is the way to go if you have no other option. So, you may be asking, what can I do as a consumer who wants to build a home? How can I protect us?
1. One of the best things you can do is go over the General Spec Sheet with your builder line by line. If you are looking at multiple builders, gather as much information as you can on how they arrived at your build price. It is also very important for you to make sure the General Spec Sheet covers EVERYTHING on the architectural plan.
2. You can also limit your financial exposure by making sure any allowances laid out in the General Spec Sheet are for items you are able to choose. These items include items such as, lighting, flooring and plumbing fixtures. Any allowances made on items such as slab or framing materials are increases waiting to happen. So, make sure allowances are given on items of choice. Also, make sure those allowances are sufficient enough to cover the items you want. The last thing you want is to have concluded that the Builder knew you wanted Viking appliances and he only gave you an allowance to cover Maytag appliances. There is a huge price difference between the two.
3. The best piece of advice we can give is for you to get to know your builder and their past clients and practices. There is a massive amount of trust placed in a relationship with a Builder. Make sure you have placed that trust in the Right One!
Being in the Real Estate industry for over 14 years and on the inside of mortgage lending for over 16 years, we too often hear horror stories about building experiences. It is imperative that you trust the builder you choose, and EVERYTHING is in writing!
One of the ways we protect you, on the mortgage side, is by inspecting the property before we send draw request funds, requiring your signature on ALL draw requests and by requiring Builder’s Risk insurance. Every bit of added protection helps, but ultimately, you the borrower, are responsible. We have worked with numerous builders and are familiar with contracts; we can always give you advice regarding building your custom home. We enjoy the custom home process! Its an opportunity to see a project come alive and you have the opportunity to build exactly what you have imagined. Let us be your guide through your custom home building journey!
We believe financial empowerment begins with knowledge. We host several Custom Home Building Seminars throughout the year, sign up for the newsletter at the bottom of our website. We will update you on the next seminar!
