Sullivan Homes PNW offers Fixed Price and Time/Material pricing
Residential construction contracts are either based on a fixed price or a time/material basis. Which one is best for you is based on a variety of factors.
Types of Contracts for New Homes
There are two types of contracts for building a new home. The type of contract is based on who takes out the construction loan. Typically, the home builder will borrow money to build the home and when it’s completed, he will sell the home to the homeowner. This is called a BUILDER FINANCED project and is a real estate transaction. The other type of contract is based on the homeowner borrowing money from a construction loan . This is called a BUYER FINANCED project and the contract between the home builder and homeowner is a personal service contract. In a buyer financed project, there are fixed price contracts and time/material contracts.
It’s important to note that a builder financed project will cost the homeowner up to 9% more in cost then a buyer financed project. Most home builders will only build builder financed projects as it provides absolute control over the project and they typically do not have to deal with the homeowner.
Sullivan Homes PNW only builds buyer financed projects. There’s no reason for a homeowner to spend the additional costs associated with builder financed projects. Plus, we really like our clients.
Fixed Price Contracts
A fixed price contract is a specific cost to build your home based on the blueprints, specifications and selections that are provided by the home builder. If the price is $500,000 to build the home, it will cost the client $500,000 for the home assuming no changes are made and no “fine print” in the contract is invoked.
- The homeowner knows for certain how much the home will cost at the beginning.
- Construction loans use fixed price contracts and cost breakdowns to determine how much the home builder will receive for each line item (construction activity) completed .
- Accounting is easier for both the home builder and homeowner as the only requirement is the submittal and approval of the monthly draw sheet which is based on activity completed per the prior month.
- The homeowner “may not” have any additional cost to have the home built.
- The home builder must anticipate the cost of construction for a year of permitting and construction. If construction cost is rising, the home builder will add additional cost to cover their expenses and add that cost to the contract. During inflationary periods, this added cost to cover future expenses can double the profit margin of a home builder and cost the homeowner significant amounts.
- Home builders may exclude certain items that a homeowner will want during construction and force them to pay much higher rates then the normal cost and profit (upgrades).
- Home builders may use inferior products and construction processes to keep the price down which creates poorly constructed homes and future problems. A key example is home builders that build with 2×6 walls where the wall studs are spaced 24″ apart versus 16″ apart. This saves money, but produces walls that may warp easier and long walls are “wavy”. Another example is home builders using 2×10’s for floor systems instead of the superior I joist beams. Using 2×10’s create uneven floors that tend to squeak over time.
- To further reduce cost and price, some home builders will not build a “turn key” home. By allowing the homeowner to paint the house, hook-up sewer/septic, install hardware, etc., the home builder is counting on the homeowner to not complete their projects according to the schedule and will charge exorbitant prices to finish activities.
- Home builders will often deny homeowner changes during construction and will often offer only a standard selection “package” that the homeowner can chose from.
- Home builders may use “change orders” to create additional revenue especially, if their costs are rising higher then projected for the project.
- Sullivan Homes PNW
- We do provide fixed price contracts for approximately half of our projects. However, we only provide a complete “turn-key” project, the best in quality of construction such as wall studs spaced 16″ apart, I joist beam floor systems, and only after full blueprints, specifications, and selections are completed. Otherwise, a home builder is just “guessing” at the cost.
- A complete set of construction specifications that detail every product and process that goes into the construction is provided along with a selection book that details every standard selection item that is part of the contract. Items such as appliances, plumbing fixtures, flooring, cabinets, and countertops are provided along with specific allowances that our clients use to select other items. All allowance items are based on the floor plan and the standard type of flooring that is included in the contract.
A time/material contract is based on the home builder charging a certain percentage of the cost of construction along with time for a set period. For instance, a home builder may estimate the cost of the home will be $400,000 and charge 15%. If the house cost $4000,000, the home builder will charge a total of $60,000 to build the home. Builders have different processes of charging for the time, but it is typically based on a superintendent and laborer’s cost spread out over a period of time and divided by the number of homes that the team can build. The above example would then cost $460,000 plus $20,000+- (estimated) for a total cost of $480,000.
- The home builder will not “guess” the rising cost of construction and add another 5% to 10% of profit to cover future cost. The home builder’s risk is mitigated and does not inflate prices.
- The process of construction, specifications and selections is an “open book” between the home builder and homeowner. This creates a much better partnership as the home builder can share information and discuss options for the homeowner during construction.
- Quality of construction is higher in a time/material contract as the home builder does not need to build with inferior products to save money.
- In times of rising cost, the homeowner can save substantial money.
- The homeowner has a much larger range of selections and changes in the time/material contract.
- Change orders are not used to generate homebuilder profits by excessive price gouging and penalty fees.
- Due to the added complexity of accounting for time/material contracts, few home builders will allow such type of contracts.
- The home builder may provide an inaccurate estimate for the cost of the house and the homeowner may suffer significant cost overruns.
- A homeowner may not have the restraint in selecting upgrades and changes that a fixed price contract provides. It’s easier if the home builder says “no”, then a homeowner telling themselves to stay in budget at the flooring showroom.
- Most construction loans do not allow for a time/material contract and require a fixed price contract. This issue can be solved by an addendum to the construction contract that creates the time/material contract from the initial fixed price cost breakdown.
- The homeowner should have sufficient reserves to pay for changes and upgrades outside of the construction loan if that occurs due to rising costs and other homeowner changes.
Which Type of Contract is Best for You?
The general rule is that if prices and cost of construction is accelerating, it’s much better to use a time/material contract then a fixed price. If the reverse is true, a fixed price contract will be better assuming that the home builder does not go out of business during the construction process.
The only real issue in a time/material contract is if the homeowner can’t control their purchases. Unfortunately, very few home builders offer time/material contracts in todays era of go fast and automate.