Before You Sign the New Home Building Contract

“We are getting ready to sign a contract to build a new home.

I am concerned because we have never done this before and want to make sure the bid is fair.

I know our contractor is reputable. However, I am not one to go into anything blindly and like to double check before I commit to things.

How do I go about verifying the prices are in the right range for things?

Thanks for your help.

Brandi

Hi Brandi,

I have a few of questions for you before I can give you some tips or ideas.

1. What do you mean by, “verifying the prices are in the right range for things?” Do you mean the “allowances” the builder is giving you for items such as flooring, light fixtures, cabinets, countertops, etc.?

2. Did you get any bids from other builders to compare?

3. Will you be getting a construction loan/mortgage, and if you are, has the lender ordered an appraisal yet to determine what your house (with land) will be worth (market value) when it is complete?

4. Is the builder pushing for a quick OK from you?

Let me know the answers to these questions and I’ll try to get back to you.

Thanks for writing,
Carl

“Thanks Carl,

Here are the answers to your questions:

1. By verifying prices I mean more on the actually construction part of it like excavation prices, plumbing, sheet rocking, painting, cost of brick….those types of things. Our contractor has provided us with a spreadsheet that breaks down the cost but I don’t know if those costs are in the range of where they are supposed to be. I myself actually priced all the cabinetry, fixtures, appliances…etc and provided those prices to our contractor.

2. We live in a very small rural community so we have actually only met with one contractor because the others all do an hourly rate versus a total cost bid. We wanted to do the total cost bid versus totaling it as we went along

3. My husband is actually meeting with the appraiser today to do the “walk through” of the plans to get the construction loan. We already own our land.

4. He is not pushing for a quick OK, I’m just want to make sure we are on the right track because this will be the largest purchase/investment I have made and I want to verify we are making an intelligent and researched decision.

I don’t know if this will help too but were are building a 2 story 2730 sq ft house with 4 bedrooms, 2 full baths, 1 1/2 bath, a formal living and dining area, a family room, screened in porch, unfinished basement with a partial brick front and siding around the rest of the house.

The current bid price for everything is $372,000.

Thank you again.
Brandi”

Hi Brandi,

It is unusual that your General Contractor would give you his spreadsheet unless he is biding your job on a cost plus basis. Builders usually don’t show their clients their profit.

Of course, they can hide their profit on a spreadsheet by inflating the costs in various categories.

Anyway, that’s irrelevant to what I’m going to tell you.

I wanted to know if he was “pushing” because I think you need to wait for the appraisal before you make a final decision on anything.

Sadly, appraisals often come in lower that people (and lenders) expect.

If the appraisal comes in too low for you, you can either trim costs.

There are many cost items that can be lowered without lowering the market value of your proposed house (resale value).

If this is deemed necessary, you can ask your appraiser for suggestions as to where to cut costs without lowering value.

Contrary to many TV shows, increasing the cost of items such as counter tops, appliances, cabinets, floor covering, etc. does not increase the value of the house dollar for dollar; it may not increase the value at all!

As to your 1st question, here’s a very rough guide that should help.)

Each category below, is shown with an AVERAGE % of TOTAL BUILDING cost based on statistics from the National Association of Home Builders.

These percentages are not “cast in stone”. They are a guideline only.

(I did the 1st category as an example:)

Permits, fees, surveys 1.5 % ($372,000 x 1.5% = $5,580)
Utilities 1.0 %
Excavation 2.0 %
Foundation, Labor & materials (L & M) 7.0 %
Rough lumber 10.0 %
Rough labor (framing) 10.0 %
Windows/Ext. doors (L & M) 3.0 %
Roofing, (L&M) 4.0 %
Concrete flatwork 2.0 %
Siding (L & M) 6.0 %
Plumbing (L & M) 5.0 %
Heating (L & M) 4.0 %
Electrical (L & M) 4.0 %
Insulation (L & M) 1.5 %
Water (or well) 2.0 %
Sewer (or septic) 2.0 %
Fireplace (L & M) 1.0 %
Drywall (L & M) 5.0 %
Cabinets (& Counter tops) 4.0 %
Interior trim (L & M) 3.0 %
Painting (L & M) 4.0 %
Appliances 1.0 %
Light fixtures 1.0 %
Floor coverings (L & M) 4.0 %
Driveway 1.5 %
Misc. 5.0 %
Total 100.0 % ($372,000)
(Category Description are from the my FREE Spreadsheets that are available on www.byoh.com/spreadsheets.htm

Here’s another spreadsheet’s version, also from the National Association of Home Builders (NAHB).

If one cost to build category comes in higher than the percentage shown, something else will have to come in lower, or you will have to increase your overall home building budget.

People have different tastes and priorities on how to spend their money, and different building suppliers and/or subcontractors in different locales have different ways to get you to spend your money.

All this shows the importance of getting an appraisal before you get too far along in the planning process.

You don’t want to overbuild for a given area.

By the way, your current bid for $372,000 = $ 136.26 per sq ft.
This is higher than the national average, but custom homes always are higher.

You might want to read my pages:
Cost Estimating Explained and Cost Estimating

I hope all this helps,
Carl Heldmann 2016

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