Once you’ve been through the stressful process of getting approved for a mortgage and a construction loan, your next big hurdle is staying within that budget for the home construction.
It sounds simple enough, but you could either wind up owing a bit extra or having a builder that cuts corner to stay within budget.
When it comes to builders, there are two types of contracts that you have to choose between. These are called cost plus contracts and fixed-price contracts. Let’s take a look at these two types of arrangements and which will work better for you.
In a cost-plus contract, a builder agrees to build a house for you for the cost of labor and materials required, plus a fee. The fee could be a fixed amount of money or a percentage of the cost, and you’ll pay this once a week or month depending on the agreement.
At face value this type of contract seems ideal. You aren’t tied to a specific plan or specifications. There’s a sense of control because you simply tell the builder what you want and it’s done. The more you want, the more you spend.
However, there’s a problem with cost-plus contracts that you may not think of right away. In a cost-plus arrangement, the builder doesn’t have any incentive to be efficient and to control costs. Worse, there’s actually an incentive to be inefficient. After all, the more you spend on labor and materials, the more money that builder makes.
A fixed-price contract is the alternative, and one we encourage you to consider. Like the name suggests, in a fixed-price contract you and the builder agree on a fixed price for a specific design, features and materials for the new house.
In this agreement, no matter what happens to the builder’s costs, you only pay the price that you’d agreed on in the first place. Now there’s no incentive to be inefficient, and the builder is required to do the job properly to avoid the need for more materials or labor.
The case against fixed-price contracts is that they’re not as flexible. You can’t just present your own design and make it so. However, a good fixed-price builder will make an effort to incorporate the customizations that you want, so long as the basic design is of a home that’s been built before.
What does this mean for your budget?
If you’ve got so much wiggle room with your money that you’re willing to chance having to pay extra, then perhaps you could explore a cost-plus builder. But when you’ve been approved for a specific amount of money, a fixed-price contract means that the work will always be within your budget no matter what.
For more information on home building and the finances involved, we invite you to call Turner & Son at 405.285.2856.