Custom Home Building Concepts You Need to Know - Allowances

What’s an allowance?  When you sign a contract for a custom home, the builder will usually give you several “allowances” for various components of the finish-out.  For example, the budgeted allowance for appliances could be $20,000.  Therefore, your home would be built, per plan, with $20,000 included in the budget for the purchasing of appliances.  This way, you can shop around and pick whatever appliances you desire. But beware- if your appliances of choice exceed $20,000, you will be responsible for covering the price excess or have to select cheaper appliances.  Conversely, if the quoted price for appliances comes back at $15,000, then the builder would write you a check for $5,000 at the project’s end.

So, when a builder sends you a proposal, be sure to carefully review all of the included allowances before signing a contract.  Usually, the following items fall under the category of an allowance:

• Appliances

• Plumbing fixtures

• Tile

• Flooring

• Countertops

• Lighting

• Rock material

• Door Hardware

• Mirrors

• Toilet and bath accessories

Make sure you’ve done your homework regarding these allowances before signing a contract.  You may have always had your heart set on a certain wood flooring (not knowing that it costs $15/SF).  If the builder lists the wood flooring allowance at $8/SF, you are going to be very bummed when you realize how much your dream wood flooring costs – forcing you to settle for something else (or cough up thousands of dollars unexpectedly).

Here are some easy and practical ways to do your homework: 

1. Shop online.  Build a spreadsheet with all the appliances you like and estimate how much you need budgeted for your fridge, oven/range, dishwasher, washer, dryer, etc.

2. Go visit a showroom.  There are a multitude of local vendors around you.  Go visit one of their showrooms and ask for a sales representative to show you around.  This way, you can touch and feel products to determine what you really like.  The sales rep can very easily put pricing together for you.

3. Enlist the help of an interior designer. This is just one of the many ways an interior designer can assist in the home building process. Check out our blog from a couple of weeks ago for an in-depth analysis of interior designers and their benefits.

As always, we are here for your peace of mind and hope this information blesses your construction experience!

Is My Remodel General Contractor Going to Run Away With My Money?

I am sure we’ve all heard this classic/horror story.  A homeowner calls a “remodel GC (General Contractor)” to their home to quote a price for a kitchen rehab.  The GC quotes a price and asks for X amount up front.  No contract is signed, and the requested upfront payment is issued.  A few days go by, and the homeowner has not heard from the GC.  A couple of weeks go by… nothing.  It’s almost as if the GC was never even planning to do the project…?

Today we want to give you guys a few tips so that you are never in this horrible situation that is all too common!

Remodel General Contractor Must Do’s

1. Ask for referrals.  This GC should be able to provide you with, at the VERY least, one or two referrals for people he’s remodeled for in the past.  Don’t hand this GC a dime until you have actually contacted these referrals to verify that this GC is reputable.  Ask for photos of his work to see if you are pleased with his finished product.

2. Does the GC have an online presence?  Are they on social media, and do they have a website?  If the GC has an online presence, they will be majorly incentivized to behave honestly and do quality work – knowing that you as the homeowner could leave a dissatisfied review online.  

3. Sign a contract.  Once you’ve done your due diligence to make sure that this GC has established some level of credibility, the next step would be to sign a contract.  The GC often has a contract of their own for you to sign.  If not, there are countless websites that offer contracts you can purchase (or even download for free).  This contract MUST dictate payment terms.  If both parties agree, it is perfectly normal for a percentage of the contract cost to be paid upfront – just make sure you have this in writing!  It is imperative that the contract stipulates exactly what work will be performed for exactly what amount.  Leave nothing to ambiguity.  Is the homeowner or the GC buying the appliances?  It should say that.  How tall is the new kitchen backsplash?  It should say that.  How long will the project take, and will there be any penalties for late completion?  It should say that.

4. Document everything along the way.  Make sure to keep records of all payments.  After every payment, have the GC sign a lien waiver as evidence that they have been paid.  If conversations were had on the job site about changes in plans, email the GC afterward in writing for confirmation.  

Don’t let the horror stories scare you off from a remodel, but do armor yourself with the knowledge to protect against such an experience. As always, we’re here for your peace of mind!

Custom Home Building Contracts: Understand This Before Signing a Cost-Plus Contract

Last year, we posted a blog about the differences between cost-plus and lump-sum contracts, along with the pros and cons of each. If you haven’t already, I would recommend reading it now! Quick recap: in a cost-plus contract, the client and the builder agree upon a locked-in, unwavering management fee that will be paid to the builder for the project. Any budget overages or remediation work will be at the client's expense; therefore, the risk lies with the client. As a result of decreased risk, the contractor typically reduces their profit which gives the appearance of a “better deal”. In a lump-sum contract, the client and the builder agree upon a locked-in, unwavering CONTRACT price for the whole project. Whatever profit the builder makes will not be revealed to the client. There is no risk for the client should any budget overages or remediation occur- the risk lies with the contractor. 

I have spent the last year and a half working on 4 different cost-plus contracts. I want to emphasize how thankful I am for every client and the opportunity to learn and grow. Starting any new venture involves trial and error and I am so grateful for the clients who have chosen to join in the adventure. We entered into these initial projects believing that a cost-plus contract was the best option for everyone involved. However, on each of these projects, unexpected costs came up. We have not been immune to soaring material prices (like concrete) after our budget was set and the contract signed. All of this resulted in the client having to cough up more money - and I’ll add - disappointedly. Because our contract was cost-plus, they had to experience firsthand the messiness of construction and shoulder much of the stress.

Is a cost-plus contract always a bad idea? No, there are certainly times when it is advantageous. But it is critically important that the client understand how much risk they bear in a cost-plus contract, AND how exposed they are to cost fluctuations. This can really steal from the joy and excitement of building your own custom home. As a builder who wants to glorify God and bless others, I have struggled with cost-plus contracts. Everything in me wants to swoop in and pay for budget overages and remediation work for my clients so they are spared the stress and strain. But when a cost-plus contract is signed and my profit is reduced, I’m stripped of the ability to intervene. 

We want to bless people. Period. If I could go back in time, I would have strongly advised most of my clients to sign a lump-sum contract with me. It may be more expensive (at least initially), but once that contract is signed, they can sit back and enjoy watching their home come together. When budget overages occur and mistakes are made, I can immediately cover them. Your peace of mind and pocketbook are spared the strain. 

This seems to be a theme with many of our blogs, but peace of mind is worth it every single time.

Lump Sum Contract v. Cost Plus Contract

The big day has arrived- you researched and found the right custom home builder, hired an architect to draw up your house plans, and are now ready to sign the contract. Traditionally, this contract is structured in one of two ways: a Lump Sum Contract or a Cost Plus Contract. My hope is to explain these two types of contracts in a way that makes it clear which path is right for you and your custom home goals. 

Path 1: Lump Sum Contract

In this contract, you and your builder have agreed upon one fixed price for all of the work shown in the plans and specifications.  Once the contract is signed and construction begins, that price will never change.  If the home builder ends up exceeding the budget on – let’s say the drywall – they will have to cover the difference out of their own pocket.  You as the client will never have to worry about these overages.

Path 2: Cost Plus Contract

In this contract, you and your builder have agreed on a “starting point” price.  Once the contract is signed and construction begins, you will be on the hook for all budget overages.  Some people call this an “open book” contract.  The builder will be legally responsible for showing you all their numbers, so you will know exactly what their expenses and profit are.

Which Path is Better?

I have used both contract types with clients, and both have their pros and cons.  In general, I would say that a Lump Sum Contract produces a smoother, more seamless construction experience for the client.  As previously mentioned, in a Lump Sum Contract, the client does not have to stress about the costs of their project once the contract is signed.  There could be an instance, for example, where the window package comes in $12K over the builder’s budget.  The client can visit the jobsite, admire the beautiful windows and never have to deal with the mental burden that these windows could have caused. In this crazy time with so much price fluctuation, the client can just enjoy the construction experience without the headache.

So why would you ever sign a Cost Plus Contract?  Typically, you will get a better deal from the builder since they are sharing all numbers with you and are not liable for unexpected costs.  Depending on the magnitude of the project, this could save you $20K to $50K.  So yes, that could be some serious savings!  Just be cautious- if you sign a Cost Plus Contract, are you prepared to spend $20K to $50K out of pocket for hiccups and surprises that come up along the way? Do you want to carry the mental burden for every expense throughout the entire construction process? 

As you can see, there is no objectively right or wrong contract path to choose; however, there is likely a better and worse option for you depending on personality and goals. Hopefully you now possess the insight to make the best possible decision!