The Truth About Budgeting
THE FRUSTRATION
The client/builder relationship often starts as an adversarial relationship. The client presses for a per-square foot price and the builder too often gives it to get the job. We call this bait and switch.
Builders bait the client with a lower price and the client signs the contract without reading the details.
If you want to know why so many hate their builder at the end of the project, it all starts at the beginning in choosing between a cost plus contract verses a fixed price contract. Here’s the difference.
FACTS
Cost Plus
Cost plus builders show every invoice and every receipt.
The client, not the builder, is in control.
Cost plus builders charge from 10-15% on all costs to build the project.
Cost plus builders tend to push for padding and contingency in the budget, which means a higher budget at the start.
Cost plus builders often have higher budget, but they have a greater job satisfaction at the end.
Cost plus builders are more focused on quality.
The only downside is they are less incentivized to save where possible, however change orders are easier to make and can happen for the most part without a heavy cost.
Cost plus builders work with allowance figures in their budgeting, which gives you freedom to pick finishes and materials from any supplier as long as they fit within that budgeted allowance.
Kelsch Construction is strictly cost plus.
Fixed Price
Fixed price builders do not show every invoice and all receipts.
The builder, not the client, is in control.
Fixed price builders can pocket up to 23% on all costs, even more in many situations.
Fixed price builders are known for increasing costs later and not giving a realistic budget at the start.
Fixed price builders are more focused on saving or the cheapest path to build, because they pocket the difference.
If a home is contracted to build at $355,000 and the builder can build for $255,000, they pocket the rest.
If you want an upgrade, they charge for it, and change orders are typically costly, no matter the size.
Major developers are strictly fixed price, because they build the same home over and over, they know the real costs, but they also charge higher than normal for upgrades, sometimes 40% higher.
Fixed price builders give you specific materials and finishes, however they control where materials are purchased and the price of those materials.
Fixed price can be good for remodels.
Unlike most builders in the areas, Kelsch construction refuses to build under a fixed price.
Budgeting Advice
When creating a cost plus budget for a new custom home, it is recommended to have at least 10% contingency. This means, if the total budget to build is $350,000, then 10% of that amount would be $35,000. This would then be added to the budget, making the final budget $385,000. To be safe, it is suggested that you add at least 5% more as padded contingency to excavation, concrete, lumber, and framing labor. If you do this, you will like your builder at the end.
Start realistic and you are better prepared for the hiccups in costs when building a new custom home.
