Uncomfortable with the concept of a builder’s fee?

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I hear many people talk about contracting their new home themselves to save money, since they’ll be saving the amount of money the builder makes in profit. And it makes sense, in theory.

But think about this: On the first day you arrived at your current job, did you know what to do without making a mistake? Could your boss replace you with someone off the street, pay them half the money, and get the same results?

I know there’s a lot of distrust built up against custom home builders, but it’s unlikely that someone with no building experience will be able to build a house smoothly without expensive mistakes. In one stroke of a pen, you can make an $8,000 mistake like approving the wrong cabinet material.

Most people set out to build their own homes to save money, and that makes sense. Some of that distrust of builders comes from the idea of the builder’s profit, but it’s worth looking at the two main types of building projects before writing them both off.

Why most builders build cost-plus

“Cost-plus” building means that you pay the actual cost of the construction, plus a fee (usually a percentage of the cost) to the builder as his fee. Why do they do this?

They do this because then the cost of the mistakes are on you. You’re responsible for material overages, increase in material and labor prices, and whatever other expensive mistakes crop up during your home build. You also pay the builder’s fee on top of that, and the fee actually goes up when there are more expensive mistakes in the home build.

No wonder many people are skittish about the price of building a custom home!

This is the origin of the fallacy that you’ll pay less for your custom home if you build it yourself. You’ll still make some mistakes, probably, but at least you won’t pay the builder’s fee on top of that. That’s great, as long as you make no more mistakes than the builder (with years of experience) would make.

Fixed-price builders have an incentive to keep costs low

The other main type of home building is “fixed-price,” which means that the builder plans out every detail of your home ahead of time, tells you how much it is, and is responsible for the cost of mistakes.

The fixed-price builder has a profit, too, or else they wouldn’t still be in business. But their profit margin decreases any time there are expensive mistakes, so they’re as motivated as you are to keep those mistakes at a minimum.

Doesn’t that tempt the fixed-price builder to cut corners if there’s a problem? Possibly, and that becomes easy to do if you don’t have an extremely detailed list of specifications he agreed to follow. Your home should be defined down to the last doorknob, so you know whether your home is built as promised.

The fixed-price builder has control processes in place, developed over the course of many years of building homes, which is why he has the confidence to give you a fixed price. He knows what he can do and what he can’t do.

He can build your home for less money, even with his profit, than you could yourself, because of the systems and techniques he’s refined over the years. And the close relationships he has with suppliers and contractors can also help you keep costs down.

A lot of folks who are interested in building a custom home for their family are understandably turned off by the way cost-plus builders price their homes. But you don’t have to sacrifice a builder’s expertise in order to have an affordable custom home. You just need to make sure your builder is also invested in keeping your costs low.

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