Custom Home Pricing
The three most popular custom home contract arrangements are: fixed price, cost plus a percentage, and cost plus a flat fee. Each of these pricing structures has advantages and disadvantages as discussed below.
With this type of arrangement, the builder and client agree on a fixed price for the home based on plans and specifications up front. The builder’s cost of construction, overhead, and profit are all included in this one price. In this type of agreement, the builder assumes the risks and benefits associated with material and labor price fluctuations. This type of arrangement is usually best when the home is a production home that the builder has built many times and has a good grasp of the cost of construction. A problem with this type of agreement for a custom home is that it is human nature that once a price is agreed upon, the client will want a little more and the builder will want to provide a little less. This can turn into an adversarial relationship. Since the client has no idea how much of the fixed price is going for construction and how much is going toward the builder’s profit and overhead, the client will usually feel the need to get prices from multiple builders. This frequently results with the client selecting the builder with the lowest price, or in other words the builder who made the biggest estimating mistake. These situations don’t usually end well.
Cost Plus Percentage
With this type of arrangement, the builder charges the client for the cost of construction plus a percentage of that cost to cover the builder’s profit and overhead. The client assumes most of the risks and benefits associated with material and labor price fluctuations. For most custom home projects this arrangement is better than the fixed price agreement, but since the builder will be paid a percentage of the cost of construction, the builder has a financial incentive to increase the cost of construction. This can leave the client wondering if the builder is working against them instead of for them.
Cost Plus Flat Fee
With this type of arrangement, the builder charges the client for the cost of construction plus a flat fee to cover the builder’s profit and overhead. This agreement is similar to cost plus a percentage except the builder does not have a financial incentive to increase the cost of construction. We believe that for most custom home projects, this type of agreement is the most fair and works best for keeping the client/builder relationship more like a team. The fee is typically 15-20% of the final cost of the home not including the lot. This is usually the best way for a homeowner to get the most value for their money. Especially when compared to the typical production builder where 25% of the final cost of the home including the lot, will be spent for builder overhead, profit, and a sales commission.