How Do I Pay My Builder?

 

There are basically three methods of paying your contractor to build or remodel your house: Turn-key price; Cost plus a percentage; Cost plus a flat fee. There are pros and cons to each method. Here is a basic overview:

 

Turn-key price – In this method, the price you pay is locked in for the total project. The scope of the project is determined prior to construction, a total price for the project (i.e., the “Turn-key price”) is determined, and any deviations from that defined project are “change orders” which usually are added to your Turn-key price. This method is more commonly used for new construction by production builders as opposed to home remodeling or new construction by custom builders. Here are the pros and cons for paying your builder this way:

 

Pros

Cons

You know your bottom line price.

Limited house plans to choose from and limited selections of products for the house.

Less day to day involvement required of you.

You and your builder need to define selections/allowances prior to finalizing contract so you know what you’re getting. Sometimes, however, you don’t know exactly what you want until you get started.

You won’t be hurt by big changes in the market (e.g., lumber prices rise).

You won’t be helped by big changes in the market (e.g., drywall prices fall).

You won’t be as tempted to go over budget because change orders are less convenient.

Change orders typically more expensive and less convenient.

You don’t have to worry about staying on top of all the costs involved in building the house.

You don’t get to see any of the costs involved in building the house to make sure you’re getting your money’s worth.

 

If you sign a Turn-Key price agreement, make certain you spend a significant amount of time reviewing with your builder what the agreement represents before you sign a contract. If you misunderstand the details of what is included in that Turn-key price then you could end up spending a significant amount of money in addition to the Turn-key price to actually get the house that you want. And, it may not be the builder’s fault – it may be because you didn’t clearly communicate your expectations beforehand or you didn’t understand what you asked for versus what you actually want. Do your homework – and do a lot — before entering a Turn-key price agreement.

 

Cost plus a percentage – With this method, you will pay the builder for all direct costs associated with building your house plus a pre-determined percentage of all those costs as his/her builder fee. For example, if all the products and services needed to build your house add up to $100,000, and your builder’s fee is 20%, then you will pay $120,000 for the total job. This pricing method is very common for remodeling projects and for many custom builders. Here are the pros and cons for this pricing method:

 

 

Pros Cons
You will be able to monitor your costs as they come in. The builder has no incentive to help you control costs since the more you spend the more he/she will profit.
Change orders are easier to make. Change orders are easier to make.
You will have more time to make your selections throughout the job. You will have to monitor your allowances on your selections more carefully to keep from going over budget.
More selections to choose from. Time it takes to sort through all of the options for your selections.

 

Some builders consider any costs associated with the job part of the total cost. For example, let’s say you have an interior designer who provides paint and wallpaper for your project and it costs $500. The builder may add a percentage onto that cost. So, your $500 of paint and wallpaper could cost you $500 plus a builder fee of $100 (i.e., 20% of $500). This could become a source of friction between you and your builder. Make sure that everyone understands exactly how the formula is applied to each product and/or service before you get started.

 

Cost plus a flat fee – In this type of building relationship, the builder is reimbursed for direct costs associated with the project as in the scenario above, but he/she is paid a flat fee for building the house as opposed to a percentage – the fee does not change if you go over or under budget. Here are the pros and cons for this method:

 

 

Pros

Cons

You will be able to monitor your costs as they come in. Your scope of work must be more defined than the cost plus a percentage scenario.
Change orders do not add to the builder’s fee. Change orders are easier to make, and the total cost of those changes can add up. Make sure you or your builder monitors this cost.
You will have more time to make your selections throughout the job and you will have more selections from which to choose. Time it takes to sort through all of the options for your selections. Make sure your builder can help guide you through these decisions.
The builder can become your advocate in controlling costs since his/her fee is unaffected by a decision that would save you money.  

 

 

Cost plus a fee is the way that our company, Brentwood Builders, operates. We have found that this method puts us on the same team with our customers: we’re able to concentrate on our customers’ cash outlays and maximize the benefits that those cash outlays can produce. This pricing method enables us to watch out for our customers’ money and best interests. And, our customers aren’t wondering about our motivations if Tyke recommends that they add an extra beam to make the house stronger or if I find a chandelier on sale. We present our customers with the best options to build their homes and do our best to help them spend their money wisely to accomplish their goals.

 

Tyke and Judith Johnson, owners of Brentwood Builders, have built custom homes in the Brentwood, Franklin and Greater Nashville areas since 1994. For more information call them at 615-776-4143, e-mail brentwoodbuilders@comcast.net or visit their website at www.brentwoodbuildersllc.com.