Custom Home Construction Contract Differences

By
Real Estate Agent with Sheri Walls, Realtor

When consumers decide to build a custom home, many things run through their minds. 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 it take to construct my home? Probably the most important question that runs through their mind is: Will my home end up costing more that the price agreed upon? This is the point I would like to address most 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. Lets 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. 

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 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?

  1. One of the best things a consumer can do is go over the General Spec Sheet with his builder line by line. It is also very important for the consumer to make sure the General Spec Sheet covers everything on the architectural plan.
  2. You can also limit you financial exposure by making sure any allowances laid out in the General Spec Sheet are for items chosen by the consumer. 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 allowance are sufficient 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 I can give is to get to know your builder and his past clients and practices. There is a huge amount of trust placed in a relationship with a Builder. Make sure you have placed that trust in the Right One!

As a Realtor, I too often hear horror stories about building experiences. So, when my husband began his own custom home building company, JMW Homes, with 14 years of residential construction experience, we wanted to change the way people viewed Builders. We set about changing minds and opinions by selecting a very simple company motto, "Making A Difference." With this state of mind, we made a conscious choice to offer our clients a Conclusive Construction Contract. By offering our clients this choice, they receive a guaranteed building price. We took this thought process two steps further by pricing out the items they exactly wanted for their home (i.e. lighting, appliances, flooring and countertops) and by refunding any unused money at the end of construction back to our client. After all, it is their money!  We want the building process to be as simple and carefree as possible. We don't want our clients wondering if we will come in on budget or not... It's Guaranteed! We are "Making A Difference!" You can visit JMW Homes at www.JMWHomesInc.com or email me any questions you might have.  You can also visit me at www.WallsToWallsRealty.com .

 

By: Sheri Walls

Realtor, Keller Williams Realty

Each Office is Independently Owned & Operated!

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Home Buying
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custom home contracts
fixed price contracts
cost plus contracts
building contracts
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Rainmaker
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Matt Evans
RE/MAX Pace Realty - Valparaiso, IN

Sheri:

Nice post on builder contracts.  It is so important for buyers and realtors to know the options, and so many do not.  I sell new construction, work with several builders, and have been a builder myself.  Knowing the ins-and-outs of new construction gives realtors like yourself and myself the important knowledge necessary.

Best of luck in your endeavors, and thanks for the nice post.

--Matt Evans, Keller Williams Realty Northern Colorado

Jan 04, 2009 04:09 PM #1
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Rainer
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Sheri Walls

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