The typical home building process is broken in many ways, from the homeowner’s perspective. The broken parts of the process cause stress and issues for owners going through a custom home build. In this article, I’d like to bring to your attention 2 areas (of many) that can be incredibly problematic. I also offer some possible solutions to try.
The Problems. The 2 problems that I’d like to bring to your attention happen during the design and bidding phase.
Problem No.1 is that you ended up with a full set of stamped house plans for a house that is too expensive to have built (way over budget).
A common scenario is that there are weeks and months of hard work during the design phase, with lots of time and money spent, as owners pour their heart into the vision of their dream home. Finally, the owners have a completed set of house plans which is ready to be put out for bids to construct it. The owners have searched for and vetted many general contractors and decided on 4 builders that were: available, who seemed like they could deliver good quality and were willing to bid for their project. Each was given a set of plans and specs.
Time goes by with a lot of back and forth-builders asking questions and making suggestions. There are also delays, such as your favorite candidate got tied up and can’t get the bid back to you when he said he would. Weeks go by (on top of the months spent in design).
Finally, 4 bids come back. All are over budget. The top 2 favorite GC’s are 1.5 and 2 times higher than the budgeted amount. There is also a wide variance in the bid amounts so it is incredibly difficult to know if there has been an apples to apples comparison. What to do?
The owner doesn’t know why or how this happened. Is the house too big? Are the selections too high end? Is there something else about the design that is a problem? Are the allowances the same (one from another)? Were the wrong people chosen to bid it?
This is a true dilemma- when one doesn’t know what caused a problem, then it is very hard to fix it. I see this exact issue with my clients and repeatedly see the same scenario posted in online building groups all of the time. How would you even begin to resolve this? Not to mention the stress (wait, I did mention it).
Problem No. 1 doesn’t always occur (some bids come back close to the budget) but if it does, then it exacerbates Problem No. 2 because the owners have to go back to the drawing board on their plans with more time and money spent. The owner’s patience is stretched even further.
Problem No. 2 is the timing of the construction contract. This can be a BIG problem.
Problem 2 occurs after you decide on a builder, based on the bids and your interviewing of them. Assuming that you’ve sorted through Problem No.1 and have an acceptable price from a builder you like. You call the builder with a ‘Yes, price agreed and we are ready to move forward-cannot wait to get started on the house!’ You have chosen the builder who will make your dream a reality.
This is where Problem 2 comes in. The chosen builder then sends you a copy of their contract. Attached to the contract are two KEY parts, which greatly affect the financial aspects to your build. These exhibits are: an Allowance Schedule and a Schedule of Values (that the draws will be based on).
Prior to this point in time, you may have had very little conversation with the builder candidates around the treatment of your money. Especially regarding these two key schedules and other important contract terms. You may not even know (really know) what some of these things even are.
Now, the contract is the real deal, staring you in the face. The builder’s contract might have terms in it that are red flags. Maybe BIG red flags, including not enough details on the Allowance Schedule or an obvious front-loaded Schedule of Values. After doing some research, you have a strong sense of ‘wow, we might be setting ourselves up for big problems if we sign the contract the way it is’.
The Broken Part of the Home Building Process
THIS…right here… is awful timing, in my opinion.
Why?
At this point, emotionally you are beyond ready to move forward and get the house started! With the builder you’ve already ‘chosen’.The same one who just gave you a possibly untenable contract to sign. The idea of having to rewind is almost impossible to even consider. Also, the builder is probably not super open to making wholesale changes to his contract. After all, that’s what he gave you and what he is accustomed to using. By the way, as absurd as this sounds, I’ve seen it happen repeatedly that the contract is, frankly, bad (one sided or worse) or with so few details that you have no idea how very important aspects will even be handled. This can lead to bad results for the owners, with no few options to get out of it.
Another reason the timing is awful is that this might be the first time that you started thinking about the financial and legal impact of what you are being asked to sign. You might not even know what those schedules really do and naively think that ‘oh, it’s standard, it will be fine’. Lack of knowledge is NOT a good place to make large financial decisions from, especially when under pressure.
Another reason why the timing is bad is that when you told the builder ‘yes, we accept your bid’ then in his mind, it is his job. Imagine how motivation changes from being accommodating (doing what he can to get the job, during interviews) to now pushing back (especially if it affects how he will get paid). Money tends to push people’s buttons and he may be getting nervous if you want to change contract terms to be more in your favor, especially at the 11th hour.
What should you do?
Do you push for the terms that you want, especially if they are fair? Bring in an attorney to review the contract, which you absolutely should. But how is that going to look if your attorney wants to add 4 pages! Do you even know what the impact of the 2 exhibits really are? Even after a brief amount of research, you realize that they are not in your favor. Some contracts are not even close to what would be considered fair, with industry standard language. Do you have enough time to find out more?
He’s probably pushing you to sign as he has other people waiting in the wings. This is the final piece to getting your dream home started so what can you do?
The scenario painted above is common. And unfortunate. And somewhat avoidable.
Solution Ideas for Problem 1.
The true solution is multifaceted and requires more in-depth knowledge than this cursory article. Quickly, however, there are a few things for you to think about:
- Basically, incorporate very good and true cost analysis during the design. It must be an integral part of designing the house, otherwise, you end up with Problem 1.
- Take full ownership of the budget, from the very beginning. No one else is watching this for you. Hard to do since you probably know very little about design and construction costs. Borrow from the investor world where financial due diligence is common practice. Dig, research, ask, study…etc.
- Know that most of the time, architects do not know costs. They spend their day designing and have very little involvement in building costs. Many use a ballpark number as a general guide for building costs, a per SF build cost. That is very problematic for many reasons and can lead to the issue of having a set of plans that you cannot afford to have built.
- Only a local general contractor (experienced in your type of house) knows building costs. Period. No one else does. They are in the field, all day, dealing with costs from vendors and subs.
- Bring in a GC or two to consult on the design, very early on. They can help value-engineer the design which means cost analysis of the design itself so that you know costs-as the plans are being drawn.
- Bring in a good designer who can also help advise on design. Another skilled person (other than the architect) can advise you on the various aspects of design that affect the cost. Such as the complexity (the number of bump outs and roof sections) or help reduce the overall amount of square footage without sacrificing.
Possible Solutions to Problem No. 2
The true solution to both problems is for owners to get way ahead of the typical process and to navigate in a different way. It’s a different path for sure so owners need to be confident and committed to incorporating the ideas presented here, because the typical path doesn’t support homeowners in this way. Now, that’s not a 100% true generalization, of course.
My favorite solution for Problem No. 2 is for the homeowner to become very well informed about the treatment of your money, plus all of the terms/conditions in a solid and fair (both ways) construction contract. It’s crucial to study these elements from the very beginning of your project, way before the contract phase. It will take time to wrap your head around these topics as they are not part of our normal lives and the concepts will probably be brand new to you. Also know that during the typical home building process, no one is going to teach you the truth (objectively) with any kind of real depth. The builder provides the documents and, most often, is the only person the owner can ask. That’s a bit like asking the fox who is guarding the hen house.
Specifically, relative to the timing of the contract review (with the important financial aspects of Allowances and Schedule of Values), my suggestion is to do it in an entirely different time frame. My suggested steps and time frames are:
1.Study way ahead of time to become knowledgeable about construction contract terms, allowances and what they are, how to handle change orders and correct draw schedules. Get to know them well enough to discuss with confidence and ease. The reason for this is that you are the one to negotiate all of those terms or just sign the contract, as is, given to you by your builder (which is NOT a good idea).
Here are two articles that can help. Please know, however, these are only introductions to the topics. They deal directly with money and since you’ll be spending hundreds of thousands of dollars (maybe millions), I suggest that you do a much deeper dive and research. I have in-depth trainings on these topics on my Shop page, but you could also hire architects and GC’s to advise you, plus wherever else you might find.
How to Use Allowance the RIGHT Way and The ONLY Way to Pay Your Builder
2. Start vetting (initial look/quick interview) potential GC’s in your area well in advance of actual bidding. Obtain a list of good interview questions, ask to visit prior and current projects and get references and call those! AND…
KEY POINT. Ask for a copy of their standard contract, with attached exhibits for a recent project they’ve done which is about the same price point as yours (they can black out prior client info). These are the documents that will tell you a lot about how this person plans to treat you, your project and your money. For me personally, certain items (or lack of) in a contract would be big enough red flags for me to simply move on from that person and I wouldn’t invite them to bid. No point in that. Bids take a lot of time and effort (for both parties) so there is no need to waste yours or the builder’s time if you find out that, basically, you don’t like how they might handle your money. It’s a good part of the vetting process.
Some builders will refuse to give out their contract using the excuse that they don’t want other builder or people in the industry to see their contract. Tell the ‘Fair enough. We’ll sign a ND (nondisclosure agreement) and will not show the contract to anyone other than our attorney.’ You might also point out that seeing the contract with attachments is just as important as seeing houses they’ve completed. The business side of their business is as important to you as the quality of their construction.
For the other candidates that may want to use, have a very direct discussion with them around how they plan to treat your money (allowances, draw schedules, change orders) and many other contract details. Get curious and ask a lot of questions (no head in the sand). In a way, it’s a kind of negotiation too where it is always a good idea to pay close attention to what the person you are negotiating with has to say.
If you don’t know much about these topics, then their answers and your overall discussion will not be of much value because you won’t really know. So, again I’d like to express the importance of owners embodying the knowledge they need around these topics so that the conversations are meaningful.
Imagine the conversations that I have with builders (when I wear my investor hat to hire a GC) around these topics! There is a level of knowledge which is the game changer. I’ve seen many investors do it too (ones without any construction experience, yet are financially savvy because they did their due diligence). I ask questions along the lines of: How do you handle allowances? Would you be ok if we add more details to the Allowance Schedule? How much notice do you need before the bank inspections? My banker won’t allow a front loaded Schedule of Values and has percentages that they insist on. Are you ok with using the bank’s percentages? How would you handle it if a suppliers sends out the wrong product, which can’t be returned? Even for something expensive like cabinets? Whose responsibility is it?
I’ll listen carefully to their answers, by the way. After all, it’s part of my interview process as I want to know how they will treat my money as much as I want to know if they’ll deliver on quality. And I want to peer into their character. There will be problems along the way. Is this someone I can trust to sort through issues with me, in a fair manner? You have to know what you are talking about to make these conversations work well.
Good news! You don’t need years of experience. You CAN study this stuff to become informed enough to confidently talk about these topics. Once you are informed, then you will hear the answers from these builders with new ears. That’s what I mean by a different game.
This guidebook is 20 pages long and can save you tons of time and money. In it, you'll find some very unique ideas. Click here for Free Guide to Making All of Your Selections Hope this helps and happy building! Julie You've got this! Remember..
of what you want and how you want it done.
