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.
There are 2 problems that I’d like to bring to your attention that happen during the design and bidding phase. That’s the good news, because it may be early enough for you to prevent the problems now that you are becoming aware of the potential pitfalls as you read this article.
Problem No.1–Bids on the House Plans are Way Over Budget
You ended up with (and paid for!) a full set of stamped house plans that turned out to be for a house that is WAY over your budget. Here’s an illustration of the pathway for a very common scenario:
The common scenario (during design) is that owners spend weeks and months of hard work and lots of dollars as they pour their heart into the vision of their dream home while working with an architect or designer. Then, finally the owners end up with a completed set of house plans which is ready to be put out for bids to construct it. Owners will have searched for and vetted many general contractors and put it out to bid to a few of the GC’s that look really good. For this example, let’s say owners 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 couldn’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 came back and ALL OF THEM are over budget. The top 2 favorite GC’s are 1-1/2 to 2 times higher than the budgeted amount. There is also a wide variance in all 4 bid amounts, so it is incredibly difficult to know if there has been a true 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? I mean, you mentioned your budget to the architect, so why are all the bids so high?
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. It is commonplace in the typical home building world. Typical meaning that it is the path the average homeowners walk down for a custom home. It is NOT typical in the world of investors (in the exact same residential design and building industry). This is the heart of all of my teachings-there are strategies that work better for owners and I want to help you discover them.
How would you even begin to resolve this? Not to mention the stress (wait, I did just 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–The Timing of the Construction Contract (it’s awful)
The timing can create BIG problems as detailed below. This article focuses on the timing only but please know that there are so very many details about the contract and negotiation of same, which requires a deeper dive into the topic. Much deeper than this one article provides. The construction contract is THE foundational piece to achieve your dream, in a successful way. I define success as enjoyable, perfect design, on time and on budget. Investors build and remodel homes all day long, in a successful way. So, it is very doable.
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. Then, what happens is that you’ll 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. This is when (under the typical home building path) your chosen builder sends a copy of the contract for the construction of your house, with all the details and the agreed upon price. Attached to the contract are two KEY parts, which greatly affect the financial aspects of 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 builder candidates around the treatment of your money. Especially regarding these two key schedules and other important contract terms. Typically, most homeowners are WOEFULLY under-informed about what allowances really are, and haven’t a clue about the Schedule of Values. Also, don’t even know (really know) what should be in a construction contract to protect them.
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. Many builder-provided contracts commonly lack key clauses that would cover important items such as: how to terminate the builder and what happens if you do or how are change orders to be handled/their timing/what level of detail needs to be provided, etc. 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’.
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 ‘hired’.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 repeatedly that the contracts are, frankly, bad (one sided or worse). Contracts with only 3 pages (double spaced with big fonts) with so few details that you have no idea how very most of the important aspects of construction and money will even be handled. This can lead to bad results for the owners, with no good 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? Imagine the internal pressure to just sign it and hope for the best?
The scenario painted above is common. And unfortunate. And somewhat avoidable.
Ideas for Avoiding Problem No. 1
The true solution is multifaceted and requires more in-depth knowledge than this introductory 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.
- Read the guides I wrote about making selections-in a different time frame than is typical! Get both guides here: 2 FREE GUIDES
Ideas for Avoiding 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.
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. Meet with a construction attorney ahead of time. Get to know terms and clauses. Find one that you like, to be on standby to review the actual contract from the builder, when ready.
3. 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. Get references and call those!
AND…please do this:
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 documents 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. Bids take a lot of time and effort (for both parties) so there is no need to waste yours or theirs.
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 not show the contract to anyone other than our attorney.’ Your construction attorney should be able to write one up. 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 is the quality of their construction.
Once you have studied the financial and legal side of contracts. Then, as part of your actual vetting and interviewing, have a very direct discussion with the GC’s around money (allowances, draw schedules, change orders) and many other contract details. Get curious and ask a lot of questions (no head in the sand).
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 what their answers really mean. 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.
Knowledge is the game changer. For example, when I interview potential builders, 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. 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. When there are problems along the way (there will be), is this someone I can trust to sort through issues with me, in a fair manner? You (as the owner) 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 game changer.
Wish You the Best, Julie Remember: You’ve got this and I’ve got your back!
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