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"Learn
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WHAT YOU NEED TO KNOW ABOUT BUILDING A NEW HOME! Deciding to build a new home is one of the biggest decisions most people make in their lifetimes and is also a large investment. The next important decision is choosing a builder. Unlike many other items that you have purchased or will purchase in the future, your choice in a builder will directly affect the quality and value of your new home forever. Consider this: no two builders will construct your home the same way. Your new home has well over 1000 different items being installed, from the footings to the finishing touches. Also, over 100 people will usually be involved with the building of your home. Ultimately, choosing a builder is the most important decision you can make and is one that should not be made lightly. Here are several things to consider and some suggestions that will make the experience of building a new home pleasurable and rewarding. The First Step - Design The first step is to determine your needs and wants. Hiring a professional engineer or architect is a good idea, but can be expensive. Average residential design services can range from $500 to several thousand dollars depending on the scope and details of the project. However, this investment will likely pay off in a better designed home that meets your needs of today and tomorrow. Experienced professionals will help you understand your needs and wants, options and how they impact the cost of building, maintenance and potential resale value. Professionals take into account local building codes, weather in the area, and much more. Many times, they can incorporate your ideas and dreams in an efficient manner as compared to a mass produced design from a book. Many people also purchase plans from the internet or books. Remember, while these prints are able to built from they may require alteration for the area and local building codes prior to use. Also, these are not personalized and do not involve the experience and benefit of one-on-one consultation, which makes a huge difference in the end result. Prints and designs purchased from production sites are often not designed for efficiency, both in building and living costs. Some companies are design-build,
which means they offer the design services in-house (with their
own staff) as well as building services. This can lead to a
very well planned and cost efficient project. Also, with this
type of company, design changes can be made more easily during
construction because the design professional is on staff and
involved with the project. Outside professionals usually charge
additional fees for any modifications, unforeseen problems,
or site visits. Finally, some design-build companies will reduce
or waive design fees if you are utilizing their building services
as well. Now that you have a design, you must get a price, choose a builder, and contract. First, you should be familiar with three types of construction documents. 1. Prints or drawings are commonly called blueprints. Prints show a graphical representation of the home and are used by the builder as a set of instructions on how to build the home. Prints show things such as quantity and location of items, dimensions and construction details. 2. Specifications (Specs. for short) are documents that describe the quality of items being used in building your new home. 3. The Written Contract describes how the process will take place and the relationship between you (the owner) and the Builder. Contracts should contain, at minimum, clauses that address construction start and completion dates, price, scope of work, payment, allowances, unforeseen circumstances, and changes to the scope of work and dispute resolution. The prints and specifications are considered part of the contract as well. It is important that these documents be complete and that you review them thoroughly to avoid misunderstandings. Now you are ready to move on to the bidding process. Some people will collect multiple bids for their new home. This is not necessarily done to get the best price, but rather to determine if a price is reasonable. Bids for the same house, with the same specifications may vary by as much as 5%-10%, usually, the larger the project, the less variation, unless the detail level is great or complex. Why Do Bids Vary? Well, since no two contractors will build your house the same way, it seems logical that no two bids would be the same. The most common reasons for variations include materials, labor and company structure. Let’s start with materials. Project specifications should spell out the quality of the materials to be used. Be weary of project specs that consist of only a list of 10 items that you easily identify with easily such as windows and trim. Vague specifications leave much to be decided by the builder, which may not be in your best interest. Remember there are over 1000 items going into your new home, and your investment. For example, what is the concrete strength specified at? This material holds up your entire house and it is vital that it be defined in the specifications. Higher quality concrete will cost more and is necessary for a long-lasting foundation. Also, how will the builder verify that the concrete meets strength? Will they test it? These types of procedures would be part of a Quality Assurance Program. All-to-often, people planning to have a home built only look at the finish items and forget about the important structural items that make up 50% of the material costs. You should review specifications carefully to make sure that the majority of the materials are defined either by type, brand or industry standard such as ASTM (American Society of Testing and Materials). When comparing bids, ensure that the specs are the same. Otherwise, you are not comparing apples to apples. Bids will also vary due to labor costs and company structure. Labor type and costs varies from company to company. How the work will be done and who will perform the work is critical, since everything must be installed on site. Specifications typically do not address labor since finished results are subjective in nature and techniques to accomplish this may vary. Here are the most common company structures. Construction Management Companies (CMs) This term is often mistakenly interchanged with general contractors. A Construction Management company has no field employees (people who perform the actual building of your home). You are paying for their experience and management abilities. These types of companies could be made up of one person or a group of people whom act as managers. CMs hire or sublet all phases of the construction out to other companies, typically called subcontractors. A subcontractor usually specializes in one type of work, such as masonry or plumbing and may work for many builders in the same area. However, this also means that the company that performed the work on the model you visited may not be the same company that performs the work on your house. CMs do not have control over who their subcontractors hire or assign to perform the work on your house. In fact, while the hiring of subcontractors is quite common, it limits the control of the builder both over schedule and quality of work performed. CMs may also have difficulty in resolving disputes and warranty issues, but we will discuss this more in another section. These companies usually have high overhead and labor costs. Sole Proprietorship This type of company usually consists of one or two people whom perform most of if not all the work. This was more common many years ago, but still exists today in some areas. While there are advantages to really knowing who is performing the work and having a relationship with them directly, this operation comes with great risk. What happens if they become ill or incapacitated? While this is not a pleasant thought, the reality is that all of your eggs are in one basket. Another concern is that a sole proprietorship business commingles company and personal business. This means what happens to that builder personally effects their business and vise-versa. This does not mean that they this type of builder is incapable, just that there is greater risk. These companies usually have low overhead and labor costs. General Contractors The best scenario is a hybrid of the two, a company that hires subcontractors and directly employs craftsmen. This type of company is known as a General Contractor. They typically subcontract out specialized work such as excavation and utilities, while using their own employees to perform many other tasks. This reduces the risk while optimizing schedule, performance and control over quality. This type of structure also protects owners if something should happen to one employee or subcontractor. Typically these companies have moderate overhead and labor costs. Many design-build companies fall under this category. It is suggested that you inquire as to what type of structure a company has when choosing a builder.
Here are some important things to keep in mind when comparing bids. On the surface, many builders claim to build the same house and most people get caught up in the price. It’s usually not the high bid you have to worry about, it’s the low bid. Be especially concerned about bids that are more than 10% less than the average. Most of the time this suggests something was omitted. Even if everything is well spelled out in drawings and specifications, doesn’t mean that a builder didn’t make a mistake; and you don’t want builders omitting items or “losing money”! Builders most commonly omit items when they use “square foot” bidding techniques, but this will be described in more detail later. First, let’s look at the “losing money” statement. It sounds strange to say, but consider this; a builder that is losing money or discovers an omission after a projected is contracted is in a tight spot. This situation does not give that builder an incentive to build your project to the best of their ability; actually they now have incentive to cut corners, increase change order costs to make up costs associated with the mistake. Something else to seriously consider is even though you are smart, your builder is smarter. This is their profession and it is not realistic to think that you can be there all the time to watch over things. Many items go unnoticed or are hidden in the foundation, walls, roof and other systems or your home. It is good for your builder to make a reasonable profit. Let’s face it; you want this guy around in the future in case there is a problem or warranty issue. If your builder goes out-of-business, you are out of luck. Therefore, be concerned about why a bid is lower than the average. This is not to say that the low bidder is always made a mistake, just a cautionary note to be weary of bids that are drastically less than the average. Something else to consider about mistakes that have resulted in “too good to be true” low bids is that a large mistake may force the builder out-of business. That means they won’t be there for service after the sale. Worse yet, this could happen while they are in the middle of building your house. This can result in long delays, liens on your project and worst of all, increased costs to complete the project. In fact, it will likely cost you double to get another contractor involved with a project that has already begun. This is due to concerns with liability for work they have not performed, uncertainty about what was done right or wrong, etc. For example, once the drywall is up, it’s difficult to tell if the wiring, plumbing, insulation, etc. was installed correctly. Many contractors, builders, and subcontractors will not even consider picking up after a bankrupt builder at any price. So the moral of the story is, while you want a fair price, you want a builder to bid the job correctly and make a fair profit in building you a great home. Typically if the bids are within 5-10% of the average, you have a fair price and your decision should be made on other items we have discussed. There are a few ways to price a project, square foot (a form of unit pricing), lump sum (fixed) and cost plus. Let’s look at these individually: Square Foot Pricing This one of the most common methods used in residential building. This can translate into a fixed or lump sum contract, but be weary of this method of calculation. Not all the square foot of your house costs the same. For example, a kitchen is more expensive than a bedroom; a two-story great room is more expensive than a single-story great room, etc. Also the term square footage should be defined. Typically, square footage refers to the living space of your home, which does include finished, heated space such as sunrooms and bonus rooms. However, garages are usually not included, but there is a difference between the cost of a two-car and three-car garage. There are also other costs that are not affected by square footage, such as utilities, driveways and sewers. Ultimately, square foot pricing is good to determine an approximate price of construction, not to contract too. If the calculated value, by square foot, is within 10-15% of your budget, it suggests that the size and style of home is most likely obtainable. If not, you may wish to consider a different size, design or style. Lump Sum Contracts and Take-Off Bids After the design is completed, a builder should perform an actual take-off bid. Essentially, the builder builds your house in their mind and on paper, most likely with a computer. This process makes a builder familiar with your project identifying special construction concerns, details and many items that would go unnoticed in a square foot bid. If not done this way, it often results in omissions as mentioned earlier. Take off bids are the fairest method of bidding to both the owner and builder. However, they require more time to perform. After a thorough take-off has been completed, a builder can complete a lump sum bid. This gives you piece of mind, knowing that the builder has committed to building your house at a certain price, but remember, time is of the essence. In today’s market materials and even labor fluctuates regularly. Prices can only be “locked in” for so long, so move quickly. Again, if uncertainty can be minimized, such as the cost of materials, it will help a builder reduce the price. It is common for builders to only hold a price for 30 days. Cost Plus This type of bid/contract is used often when construction must begin before the design is completed or when something must be built quickly. Usually the builder provides the owner with a rough estimate of the total cost. However, cost plus contracts are set up for the Owner to pay actual costs for materials and labor (in-house labor is typically set up at an hourly rate) and then a percentage over that. Because of the reduced uncertainty for the builder, the percent profit should be on the lower end of the range mentioned above. This can be done very effectively in residential construction however; it reduces the risk for the builder and places more of the risk upon the owner since you have no commitment on price. The builder invoices for materials and labor performed using a summary of actually costs so that you know what the actual costs are. This can result in a lower cost for the owner if managed properly. Also, if you expect a lot of changes, it may be more effective to go with a cost plus bid. All of these methods have an appropriate application. It is recommended to use square foot bidding to get an idea for the house design as compared to your budget. Then get a fixed or cost plus bid/contract based on your needs and situation. A final note on bids, a common profit in the home building industry is between 8-15%. Usually, the builders at the higher end are more experienced or reputable. Sometimes a high bid can be made in error or be a sign that a builder has too much work at that particular time. This way if the builder gets the bid, he can pay the overtime necessary to perform the work. If something seems too good to be true, it most likely is. For your new home, which is a major investment, maybe your dream home now is not the time to cut corners. Perform the proper research and make the investment of time in selecting a builder. Your decision here, will affect you for the rest of your life. Other important traits to consider in choosing a builder are professionalism and follow-up. Don’t be too concerned that something may go wrong during the building of your new home, because it most likely will. Be interested in how a company handles mistakes and handles situations after the job is completed. This is a far better attribute than just working through the construction period. After all, your home will be around a lot longer than six months. The best suggestion is to
go with a builder that you feel comfortable with, have a relationship
with, good references for and that scores well on the checklists
provided. If their bid is not the lowest, approach them with
this. Many times a difference in specifications may be determined
or adjustments made. Some builders will reduce costs, for reducing
risk on a project such as varying material costs, definite start
dates for scheduling, known soil and site conditions, controlled
allowances, etc. Click here to view and utilize a checklist we've made for you when evaluating home builders. |