When you choose to build your home, the first question you may ask is, “How much will it cost to build my home?” The second question may be whether you should choose a fixed price or cost plus contract. There are pros and cons to each, for both the buyer and the builder. In this article, Mueller Homes helps you examine whether you should build with a fixed price or cost plus contract and the pros/cons of each.
Fixed price contracts are where the builder is contracted to construct the home at a set price. The buyer often likes this contract because there is a set amount (unless change orders are requested) for the entire construction process. Fixed price contracts provide clients a clear budgeting process, provided there are detailed specifications and allowances are not overly vague.
Completed drawings with detailed specifications are essential to the fixed price process. Vague specifications are far from transparent and often make comparing bids an apples-to-oranges process. Here is where we strongly advise you to contract either your builder or architect to work with you to create detailed specifications. Detailed specifications ensure you’re comparing apples to apples and preferences will be priced into the project. There may be allowances for some items, but detailed specifications make sure those allowances are in line with your expectations and preferences. We discuss the consistency of design and selections later in this book as well.
- Pros – the Fixed Price model provides a relative certainty of costs, adherence to a defined budget, and the builder is incentivized to efficiently procure and execute the project.
- Cons – the Fixed Price model means that the homeowner must make most of the selections in advance before final pricing can be provided and work can begin.
The biggest challenge with Fixed Price or a bidding process is that some builders will quote lower priced or inferior products to win the bid and ultimately the homeowner will not realize these discrepancies or substitutions until they are far along into the building process. This may result in more change orders to accommodate the homeowner’s design or quality preferences. So, be aware of low bids when going with the fixed price option. It can be a recipe for disaster. The best way to avoid this is to begin with a fully-detailed set of specifications which has little room for interpretation.
Cost Plus contracts are used when the builder is contracted to construct the home at actual costs plus an pre-agreed upon fee (to cover overhead, administration, and profit). Every aspect of the costs associated with this type of project are completely transparent and this model is ideal for the homeowner who has a project concept but wants the design to be fluid throughout the process. This type of arrangement is also used when the homeowner or architect wants to be intimately involved with the entire construction process, making decisions and design selections, as the project progresses vs. upfront. This process is completely transparent with the builder providing all the details and associated costs to the client, with a fixed margin added to each for the building and administration of the home. This option may be more suitable for the client who is having difficulty comparing apples to apples, often due to a lack of thoroughly detailed specifications.
- Pros – Cost Plus may be more appropriate for the client who has a more flexible budget. It may also be preferable when the plans and specs are not finalized and it makes sense to begin construction without complete details. For the client who wants the building experience to evolve, and to make decisions as the project progresses, perhaps with the guidance of interior designer or architect, this is often the method preferred.
- Cons – The cost-plus model will leave the budget a little more open-ended. The client will need to have a great relationship with their builder, architect, and/or designer to keep them from the infamous ‘shopping cart’ mentality which can increase a projects overall budget. There is inherently more paperwork involved with this process, as the client reviews invoices and costs on a monthly basis, as the project moves forward. Do not enter this process unless your builder has technology and transparency to make it a smooth and process-oriented experience.
Most luxury custom builders can accommodate either approach, based on the client’s needs. Be sure to make your decision about whether to use a fixed price or cost plus contract with a clear understanding of the pros/cons and an honest conversation with your builder of choice. Most importantly, choose a builder with whom you have a good relationship, has good reviews, and has longevity as a business owner in the industry. Discuss your preferences with the builder and ensure that they have utilized this approach for previous projects – make sure to ask for references for those projects too so that you can understand the experience, from a homeowner’s perspective.
If you are thinking about building your once-in-a-lifetime custom luxury home, be sure to download our FREE ebook: “Designing & Building Your Custom Dream Home: How to Create an Experience You’ll Love to Remember.”
Ready to get started? Contact Mueller Homes today, and let’s talk!