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 the specifications and allowances are clearly stated. In this model, the builder assumes the risk for any material and labor price fluctuations.
Completed drawings with clear specifications are essential to the fixed price process. Here is where we strongly advise you to contract either your builder or architect to work with you to provide 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.
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). If the buyer wants certainty with the final cost, without variation (other than change orders), this is not the ideal model. This type of arrangement is 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.
- 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 – However, keep in mind, that the cost-plus model will leave the budget much more open-ended. There is also more paperwork involved with this process, as an added layer of accounting is required because costs are consolidated and accounted for on a monthly basis and presented to the owner for monthly payment.
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.
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!