Contracting Out a Custom Project

Once the decision has been made on Contractor selection for your project with the helpful information I provided in the first two Blogs, it is now time to move toward a contract for construction we will assume if the contract is for a new home you have the lot, or one picked out to build on. If you are renovating your existing you are pretty much ready to begin.... 

By this time your Builder of choice has spent many hours with you that was most likely not billed out... Sales hours we call them... sometimes Builders request a retainer for some of this work, which is deducted/or/ applied later if the project moves forward in the first billing cycle... retainers are not refundable if the project does not proceed....in either event, you are ready for the next step.

This phase definitely has costs related and starts the meter turning. This is the planning and development phase in which your dreams and desires are actually put on paper in the way of Drawings detailed for preliminary review and final cost budgeting. Your Builder and you will work closely with the design professionals to develop a good solid Preliminary Plan ( floor plan & elevations ) to meet with your approval. By this time you should know, like and trust your Builder and feel at ease moving forward. You are making only a commitment at this point to proceed with the drawings and design, NOT the final construction of the home.....that comes later... 

Once the Prelims are completed and approved, your Builder can then perform more detailed estimates of project cost. The Builder is now working with a good set of drawings all to scale and can send out copies to the trades to adjust and nail down the cost categories. This will provide some insurance that the home of your desires is in fact within the budget you wish to spend....assuming all that comes in positive... it is now time to finalize the Contract for Construction and payments... 

There are essentially two types of construction contracts:

1. Fixed Price Cost
2. Cost Plus Contracts: 
   • Cost plus % to Contractor
   • Cost plus fixed amount to Contractor
   • Cost plus fixed amount with bonus incentive 

No matter which contract agreement is chosen for your project, you should always allow between 10 — 20 % of the initial cost budget to have in reserves for potential cost overruns. This is NOT to say the Contractor has made error in his cost estimate projections....there are always factors that change cost projections such as...unknown factors that pop up, inflationary cost increases on materials and equipment, and....the desires of the Owners to add items or purchase extremely expensive finishes etc... These cost overruns usually always occur in the last 50% of the construction, the finishing phases. You may be 10% under budget at the " under roof" phase, but remember....at this phase you are only about 40% through the project. The next 60% is the most critical to cost budget control. 

Change orders create much difficulty and paperwork to a fixed contract to construct on a Custom Project. If a fixed contract is desired be sure to have every detail of quality of product and ample Allowances that are clearly defined. Specifications must be very detailed...this is usually NOT the norm in residential construction....the plans do not include this detail and there are no specification booklets as is common in commercial construction projects. This opens the door to a lot of Extras and potential problems between Contractor and Owner... _most of which is lack of detail and communication.... 

Cost plus contracts would be the preferred method of contracting for a custom home or renovation project. I listed three different types of cost plus contracts above... basically these are all a form of Construction Management Contracts, where the Owner is hiring the services of the Contractor to manage, supervise and oversee the complete construction process. These are fun projects with much less stress for both parties in that there is a Partnership agreement between Owner and Contractor to construct the project together. If the Owner desires to perform some of the work this is usually welcomed to reduce costs. All cost savings on the project go directly to the Owner....on the other side...all cost overruns are also the direct responsibility of the Owner. However... if a good sound cost budget is prepared there are usually no problems at all ....and in most cases our clients have saved a lot of money.... 

Bottom line....The Owner receives all their desires and a quality job at net cost The Contractor is guaranteed a fair margin for his work, talent and ability with minimal risk factor... 

More detail of Cost Plus Contracts: 

Contract A : Cost plus a % of costs. This is simply that the Contractor will add the agreed percentage to every cost ( materials, labor and sub-contract ) relating to the project. This is a simple method, however more costly to the Owner....if Owner chooses a $ 1000 chandelier for lighting fixture over a $ 100 Home depot fixture Contractor makes more $$....same with all aspects of the project costs....it usually takes the same amount of time to coordinate the expensive applications as it does the cheap applications_ I would much prefer a % of cost contract with a "high roller" client in Naples every day....but that would not be doing due diligence to my client.... 

Contract B : Cost plus fixed fee. This is the most fair and equitable cost plus agreement. Contractor knows the approximate amount of the project cost, and he also can budget the amount of construction time involved for his services....he then fixes in a project management fee that is usually billed out monthly for supervision, and project management. Contractor has no incentive to push for or recommend a higher priced product or trade... he is strictly " Riding for the Brand " so to speak.....comes from my past cowboy days.....ha ha... 
Contract C : Cost plus/ fixed fee with incentive. This is also a good tool to use in contracting a project. The Contractor will receive a % of cost saving bonus at the end of the project for bringing the project in under budget....this could be as much as 50/50 split of cost savings... however negotiated, the Owner feels very comfortable the Contractor is looking after his best interests in order to receive a bonus...this works very well for Owners that are out of state and not around much during the construction process... 

We strive to make the construction process as stress free and fun as is physically possible... this can be one.of most exciting times of your life, or one of the most miserable.....hopefully some of our insights, knowledge and experiences will assist you in having a wonderful experience with your construction project.. 

- Marty Untch

What Should a New Home Cost?

Trying to determine how much a custom home will cost that will suit your dreams and desires can be quite a challenge. It also depends on who you talk to, and are they giving you the real numbers, or low balling the cost as a sales pitch to draw you in. One thing I have found in my 42 years of experience in the construction industry, is that I place little or no value on a cost PSF basis for custom homes. This basis is fine for production builders that are duplicating the same few home designs over and over again utilizing the exact same specifications on every project....Custom homes however are much different....

Typically, PSF costs of construction is determined by dividing the cost by the SF of ONLY the air conditioned space ( for warm climate areas )....or ...heated space for colder climates. That formula would include some algorithm for what would be considered " other space ", which would have to include the garage area, porches, Lanais etc..... If the homes are pretty much all alike with the " other space " areas comparable a SF cost basis would be fairly accurate and only require adjustment for inflationary costs. This could be a way to somewhat compare one production or tract builder to another.....but unless you are very skilled in construction practices and procedures it will be almost impossible to determine why one builder has a cost of $ 20 PSF less for his product than another.. ...Are his profit margins just higher, or is his quality of product much less  ? good question....maybe his " other space " areas are twice a large, such as a 3 car garage, golf cart storage bay, oversize Lanai etc.....there are many other items that effect cost....below I will mention a few: 

1. SOFT COSTS OR INDIRECT COSTS 

These are costs that are not directly associated with the actual brick and mortar hard construction of the home. These costs however, are real costs and will calculated in with the overall building costs. These costs are " regionally " specific, and include the following:

• Plan design & engineering.
• Survey costs.
• Energy Calcs.
• Utility tap fees: sewer, water, septic, well, etc.
• Building Permit & Impact fees.
• Testing services....site fill- compaction etc.... 

These costs vary geographically as well....is the location of construction in a Flood Zone..?...is the location in a high wind hurricane zone  9 .is the property a developed lot, or raw acreage  7  ..the list goes on.. 

Soft costs can be substantial and can range between $ 10,000 to over $ 30,000
Note that production builders duplicating the same plans over and over again and within a developed community will have a much lesser cost base for these cost items. The actual plans and engineering have been done and submitted many times before.....if you don't mind having the exact same home as many of your neighbors this may be fine for you. The utility tap fees are usually tied in with the lot purchase or spread out over a period of years that you will pay with your real estate taxes or CD fees....this is one area where production homes could be $ 20 to $ 25 PSF less than a custom home...

2. FLOOD PLAIN LOCATION 

If the property you are going to build on is in a Flood Plain area, the site development costs will be greatly affected. The house building pads will need to elevated by 2-3 ft pending the flood zone. Elevated building pads require many loads of compacted fills and usually taller foundation and stem wall construction... all adding costs that could amount to $ 10 — $15 PSF.

3. CONSTRUCTION MATERIALS USED

This is a very detailed area and I could write pages on this subject....however, I will use only one simple example and I think you will understand my point. Keep in mind, this is ONLY one example...there are hundreds.... If a builder uses 1/4 " OSB ( particle board type material ) for his roof sheathing, his product cost factor would be about $ 10 per sht. Upgrade that spec to 518" plywood and that cost goes to $ 22 per sht. Upgrade that to the best energy efficient roof shtg which is 5/8" Solar Ply and that cost rises to $ 26.50 sht. Base comparison on an average 2,000 SF home and the cost differential between OSB and 5/8 Solar Ply is about $ 2,500 with tax....that one item alone amounts $ 1.25 PSF. 

4. DOORS AND WINDOWS

This category can be a huge factor affecting costs. The quality, size and energy efficient ratings vary greatly in price. Using PGT XL 70 solar ban insulated glass with Impact resistant glazing in all the exterior doors, sliding glass doors and windows will cost much more than using a lesser quality product, non-impact glass and panel shutters....this could account for about $ 3 PSF in cost difference.

5. INTERIOR FINISHES — FLOOR COVERINGS

Again....one example should give you the idea... 
Let's take a standard bedroom of 200 SF and compare just the flooring costs for that one room.... 

• Carpet the room using a $ 30 per sq yd product and the cost would be $ 660 ( 3.30 psf ) 
• Tile the same room using a cost factor of $ 6.50 psf material & labor $ 1,300
• Install a quality wood flooring in that room at $10.00 psf and the cost is $ 2,000

Now you see why builders have a lot of carpet in their cheaper " base price " of the homes...lower the SF cost, attract you in.....and then.... hit you with EXTRAS..... 

6. ALLOWANCES PROVIDED

Allowances are usually provided for plumbing fixtures, lighting fixtures, cabinetry, appliances, flooring etc  We have seen some ridiculously low Allowance numbers built in the price of homes. A savvy client should dig deep in to the fine print of any home price to determine if the Allowance amounts are comfortable and reasonable. You saw prior how flooring can affect costs, just think about the cabinetry package costs can very from $ 20,000 to $ 60,000 in this category.... 

In closing... just the few items mentioned in this blog can have an affect to cost factors by as much as $ 40 PSF.....that is about $ 80,000 on a 2.000 SF home;;;; 
Maybe that " Custom Builder " you talked to and liked, but was too expensive, is NOT really that expensive after all  remember the old sayings that will always hold true: 
" You always get what you pay for " 
" If it seems to good to be true....it is ..." 
- Marty Untch

Know Your Contractor

I personally have never liked the term " Contractor " ....I much prefer being referred to as a "Builder"....maybe I should explain that.... 

A Contractor by definition is "one who contracts the services of others to construct buildings" ...a Builder by definition is "a construction worker or one who builds." Granted, in the detailed construction of a building there are many specialty trades involved that need to be contracted out, however, I think the best possible scenario would be a Contractor with a Builder background and skilled in some of the major trades required in construction. A Contractor with a Builder background can see the project from all sides and angles, and is best suited to oversee and supervise the construction process, and provide a close personal relationship with his clients. This quality of Contractor/Builder is most generally found in the "Custom Home" market. A custom home is a one of a kind, never built before, and specifically designed to meet the individual desires of the client " Owner " . A custom home demands a tremendous skill set from the Contractor/Builder. This would involve that the Contractor/Builder personally perform the following:

• The initial preliminary design of the structure desired.
•  Perform ALL material take off lists for the project.
• Provide accurate labor estimates for the project.
• Meet with the mechanical sub trades to review the operating systems of the home and determine the specifications for such trades.
• Work closely with the Energy Calc Engineer to be sure the structure has the very best energy efficient design and products available.
• Work closely with the design professionals in the window & door business to be sure product size and specifications are met.
• Work closely with the project Engineer of record to assist in design/engineering for the project. 

By performing all of the above, the Builder is literally constructing the building on paper. He is also becoming very familiar with the overall project and plan, and can easily locate any design flaws or areas of difficulty that may arise. If modifications or changes should be made to design, these details can be caught way ahead of time and corrected early on. 

A Contractor that is not a Builder must rely on outside sources for the initial design. Then send the plans out to the various material suppliers and trades for pricing. The Contractor using this method of cost/budget procedure is completely reliant upon others for accuracy and quality of product. To be successful you must have complete control of the project from the initial planning phase to the final completion....I have never been comfortable with giving up that control during the planning stage. This process of job costing is risky, as the prices that come in are noted as " estimates " with no guarantees of accuracy or responsibility of specification. Errors and omissions in these estimates fall directly upon the Contractor to absorb, which essentially will fall back upon the Owner/Client. 

The above is contrast to the world of production construction. The Production Contractor does not have to be a Builder. Production Contractors have basic building plans that are reproduced over and over. Once they have stumbled through the first plan project and corrected any flaws found, it is simple to reproduce that home. All a production Contractor really has to do is revise his costs for inflationary conditions and have his sales team market and sell the product. Production Contractors spend most of their time searching for " lowest bid " and cheaper products to implement for cost reduction. Due to the highly competitive atmosphere for this type of construction, having a lower price takes precedence to improving quality of construction. The Principals of the production building category are mostly corporate types and most likely do not have any tools of their own. They are professional businessmen, not professional Builders. 

Both types of Contractors are necessary for our marketplace here in southwest. Florida. There is a large demand market for developed communities and the need to mass produce residential dwellings in which the production builders can quickly provide. In my view however, there is no crossing of the line between a production Contractor and a Building Contractor of custom homes. 

Hopefully this information will assist you in determining which type of Contractor is best suited for the type of home you wish to pursue. Once that decision is made we may suggest you then investigate the potential Contractor/s of choice by checking:

• How many years have they been in business...if they were around long before the market crash of 2007, and are still around today, that in itself says a lot...
• Is/Are the Principals of the company you are planning to deal with the actual Qualifier for the License?...this can determined through the State Licensing Division website at www.mytionuancense.com.
• Ask for references of past work performed....and call those references.
• View some of the projects completed and currently under construction.
• Ask about their energy efficiency plan of construction.
• Ask who you will be dealing with during the construction process as the project supervisor or direct contact person. This commitment could last between 8-12 months and you should be very comfortable with that person.
• Be sure the Contractor is credit-worthy. Don't be shy about searching the County Clerk of Courts records for the company and the principals individually. You can also view while on if any complaints were ever filed on the licensee.
• Ask about their process of obtaining Lien Waivers for the project to protect your interests....especially when suppliers send out a " Notice to Owner " statement making you aware they are providing materials on your project....this is common these days and nothing to be alarmed about as long as you have a paper trail of properly executed Lien Waivers.

We wish you well with your future construction projects we are always available to assist you as well... 

-Martin Untch