FINALIZING BUILDER
CONTRACT AND
COST BREAKDOWN
What Makes Up Your Cost to Build?
Once you and your builder have negotiated the bid and timeline, they should be able to provide you with a cost breakdown or final purchase price along with a contract. Depending on the builder, your bid may come back with each cost category broken down individually or you may just have a total price. Your cost to build may include itemized hard costs, allowances, loan closing costs, contingency, and builder profit. There are two main ways that builders structure their profit: fixed-price or cost-plus. It is important to discuss this with your builder when negotiating the cost to build.
Fixed-Price or Cost-Plus Contract: What’s the Difference?
Fixed-Price Contract
A fixed-price contract is an agreement to construct your home at a set price. It includes both the cost of materials, labor, and the builder’s profit. An advantage of a fixed-price contract is the cost is set before construction begins. With this type of contract, there is risk to the builder in that the costs may come in higher than the contract price. To that point, it is especially important your contract specify what costs can increase, what type/grade of materials are to be used and how different areas throughout the interior and exterior will be finished. This type of contract is more prevalent with production builders who offer stock house plans through a design-build arrangement.
Cost-Plus Contract
A cost-plus contract means the price to construct your home is dependent on the actual costs as your home is built, plus an additional fee designated as profit or overhead. Your builder will give the best estimate at the time construction begins; however, costs of some materials fluctuate and can vary as construction progresses. Fluctuation can include both the cost of materials and labor. Your contract will define the amount of profit or overhead as a percentage of the total cost to build or a fixed dollar amount of profit. With a cost-plus contract, it is critical the contract specify and detail how the profit will be charged. For the builder, the cost-plus contract provides the security of a guaranteed profit.
Avoid the Pitfalls of Cost Overruns with a Contingency
When preparing your cost breakdown, it is important to budget for a contingency. A contingency is defined as an amount of money that is included to cover potential events that are not specifically accounted for in a cost estimate. The contingency can be used to pay for overages when line items come in higher than your estimated budget during construction. Most overages are a result of upgrading finishes or increases in the price of building materials. Without a contingency, you would be responsible for paying overages out of pocket. USU Credit Union recommends a 10% contingency. Your Mortgage Expert and builder will be able to advise you if they recommend a higher contingency.
It is best to plan for the unexpected; however, staying on budget is very important. With a contingency added to your cost to build, your Mortgage Expert will qualify you at a higher loan amount. If you do not use the contingency or only a partial amount is used, your final long-term loan amount will be reduced at no penalty to you. Your original loan approval remains intact even if the loan amount goes down. If the loan amount increases, (all of the budget and contingency are used) your final loan terms will change.
Finalizing Your Cost Breakdown
Once you and your builder have negotiated the bid and timeline, they should be able to provide you with a final, revised cost breakdown or final purchase price. Both parties will need to sign a contract. You are ready to meet with your Mortgage Expert to begin the processing of your construction loan. Your Mortgage Expert will analyze and calculate the loan numbers based on contract and cost breakdown, as well as answer any questions you may have. You will receive an updated Loan Estimate for your projected closing costs based on your loan amount, down payment, and interest rate.
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