It’s a home builder’s business to make money building custom homes, but it’s also their responsibility to look out for you, be your advocate and make decisions with your best interest in mind. Unfortunately, the relationship and sense of trust can get blurred over the many financing options and contract types available to the homeowner. This is especially true for the method used to determine a final cost for your new home. Cost plus contracts and fixed price contracts are two ways to generate the price tag.
Fixed Cost Contracts
This method requires the homebuilder to acquire bids from subcontractors for the scope of the work before any construction begins. The builder and subcontractor then enter into an agreement over the established bid, agreeing that work will not exceed the predetermined amount unless the homeowner requests changes and signs off on price variations. The advantage to the homeowner is clear—they know upfront what prices the subcontractors are charging and where the homebuilder is making money. Spending more than planned isn’t usually a concern unless the homeowner decides to go over agreed upon budgets or make changes to major areas like floor plans or other home features.
Cost Plus Contracts
This method is based on estimates for building costs, not bids. There is a fixed percentage above the cost that is paid to the builder by the homeowner for overhead and profit. This may sound advantageous for all parties, but the concerning difference is that cost plus contracts don’t establish a fixed home price. When subcontractors aren’t working off of a bid, rather an estimate, they’re given the freedom to dictate the final cost of their work. This opens the door for potential price fluctuations that aren’t in the homeowner’s best interest or budget. The buyer assumes all risk.
Understand the fine lines
Cost plus building appears beneficial because you’re led to believe the project could come in under budget, when really you’re actually signing off on increased costs before work even begins. Once the invoices start rolling in you’re assumed responsible for paying the overage against the original estimate. Cost plus hits you with unwanted surprises, but by this point in the building process you’re in too deep to switch builders or make changes to the agreement.
Honest, straightforward homebuilding
When embarking on the journey to build a custom home, you do have ability to control the final cost. The scope of the entire project is based on what you’re comfortable spending. However, budget can be difficult to manage when you’re agreeing to sign dotted lines for loose estimates, not fixed costs.
At Highland Builders, our team takes great pride in being your teammate and guide through such an exciting process. It’s our promise to offer sound advice that compliments your desires and budget while making your best interests our top priority. We build with you, not for you. To start a conversation about our no surprises custom home building experience, contact Highland Builders today at 804-449-6006.
