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How Do Builders and Remodelers Charge for Projects?

How to Make Sure You Choose the Right Contractor for Your Home

Hey, thanks for visiting Real Property today. Today, we’re going to talk about how you can talk to builders and remodeling contractors about what they’re charging you, and we’re going to go over some tips on what you should be asking them. If you’re looking to buy or sell a house, do a remodel, or you have some land or are buying land to build a house this is something that could help.

Get Clear on the Costs

You want to talk to the builder or the remodeling contractor about this right at the very front end of your conversations with them to find out how they do things. If you’re looking at comparing possible pricing structures, or the guy tells you hey it’s going to cost this much, you have to know what’s included in that and how they charge you through the project.

How a Lender Cost Breakdown Works to Help Get Clear on Costs

The first thing is I’m going to share my screen with you and show you an example of a lender cost breakdown. The lender cost breakdown is what would be prepped to go to a lender, so it has building costs, soft costs, and site costs, and it has your totals in green and then prepaid so anything that has been paid on the front end. You don’t need to worry about prepaid on this or the remaining balance column, so we’re going to talk more about how the individual line items are structured.

What Will You Find on a Lender Cost Breakdown?

On this particular cost breakdown you’re going to see on the left-hand side you have a cost category, so these are different line items. You have your letter of intent, this is like your design portion of an agreement, your permits and fees, and permit processing. It will skip down to your grading, rough carpentry, lumber, fireplace, rock veneer, plumbing, and electrical, so all the main components of the house and all the site costs, every single line item, are listed out on the cost breakdown. Then you go all the way down and get to the bottom where you have a subtotal and then there’s always typically miscellaneous.

Miscellaneous Category on the Cost Breakdown

If you’re getting a loan with the bank they’re going to require miscellaneous regardless, 2% is about as tight as you can go, remodels could be as high as 10%+ depending on what kind of a project it is, so you have to know that there’s going to be some miscellaneous costs that are unaccounted for in the project depending on the number of unknowns that are there. New construction can get a lot tighter on the numbers when inflation is not happening, so it’s been very difficult to do this in the last year. We’ve seen 10 to 20% increases in costs but for the most part, 2% is what you will typically have for a miscellaneous tendency. This is for unforeseen items that are happening, could be weather, whatever, so that could occur.

Supervision Line Item for a Cost Breakdown

Then you have your subtotal after that. Builders will use subtotals differently but this particular cost breakdown has a supervision line item. That’s going to be a percentage of the project, and then you have an overhead, profit line item on the bottom, and then you’ll have a total. This particular way that this cost breakdown is broken down is you have all of your costs up top, these are actual bids or direct allowances. The exact allowances for what you would spend to buy say your appliances or the exact amount that the framer did for the rough carpentry work. These line items in the example are for your rough carpentry. This particular cost breakdown is set up to where you could pull a bid out and say hey this thing’s $35,200, the bid I got from the framer, and that’s going to match up. If a builder tells you the way they do it is to have all of your costs and then put a margin at the bottom that will cover supervision, overhead, and profit, that’s what this would look like. They should be able to provide you with an exact bid that will match one of those line items.

How to Tell if You're Being Charged a Fixed Price

Even if it’s a fixed price this is a way that you can tell if that’s the case. You could spot-check it and say hey do you have a bid I could look at for $35,200 to match the framing number or some of your appliances or another line, maybe drywall, you can see that you’re being provided true numbers all the way down the cost breakdown. You know what a lot of times will happen is a guy will tell you, I’m going to do this for 10% so it’s going to be cost plus 10% or whatever he says sounds like a good price. What will happen a lot of times is you’ll have these costs where he’ll actually build a margin into each one of the line items and then have the numbers down below. The contractor has the numbers and then the numbers for overhead, supervision, and profit will be much lower. You want to be aware of that, that can happen.

How to Know What You're Being Charged for Your Home Build or Remodel

We like to do it to where all the numbers are above so that all the line items are exactly what you get to spend on your appliances, plumbing fixtures, or contractors because then we can show you an exact number. You’ll know exactly what is included in the exact number. We’re looking to help people when they’re getting ready to build, this is what we look at to make sure that this is being done. You know what the costs are. We prefer this method because it’s very clear, there’s nothing hidden, and it’s very transparent as to what’s being spent. Then the fee is what the fee is, these numbers could be anywhere from a 20% margin up to a 45% margin depending on the particular complexity of the job is and the length of the job, so there are a lot of different things that go into what is charged, it’s all taken into account. 

Cost-Plus for a Cost Breakdown

The other way that some builders will do this is they will look at this and they’ll go, okay well, I’m going do a cost-plus, so they’ll do all their costs and they’ll do a plus. Just make sure that their numbers are not built up. You’ll also have a job where someone will have a fixed fee and go I’ll do it for $100,000 or $200,000. Then you know that’s going to be down at the bottom of the cost breakdown so all these should be exact cost plus that amount at the bottom.

Get Clear on What Changes Would Add Additional Build Costs

Now, the thing that happens when you’re doing custom homes is you get some things that need changes that you can be made during the process. Some changes are irrelevant, they don’t add more time, costs, complexity, or length of days to the project. The expenses the actual builder charges you may be a fixed price like a fee to do that, he wouldn’t raise his price to do that. But as soon as let’s say you went from vinyl windows to wood windows that were curved and had arches in them, there is a lot more work on the framing stage as well as more work in the drywall stages and on the doors as well for the door jams that had kerfing, so that’s going to add more work for the builder and add more length of time to the project. When you make changes like that you have to ask is this going to increase costs if we make certain changes. Try to get clear on what those certain changes would be that would trigger additional costs for them if it’s on a fixed price with a fixed fee at the bottom.

Get Clear on How Change Orders Work for Home Builds and Remodels

Typically, if you’re on a contract that’s similar to this where you have all your exact costs above you’re going to have a certain change or clause inside the contract for any change orders that are done. They’re going to range between a 20% margin up to a 45% margin on the change orders that are done. So just make sure you’re clear on how the change orders are handled, and that way you know you’re clear whenever the extra costs come in for that change.

Better Clarify What Is Included in the Final Build Costs for Your Home Project

To better clarify these columns you have a build cost column, and soft costs, these are non-building actual construction-related costs like the planning, fees such as engineering, and everything that is done upfront. Then you have actual building costs, these are the actual hard costs like materials and labor that’s going into the project. You have your site costs that are site related, solar we keep in site costs but it could go over in the build costs. It’s normally a pretty good chunk of money so it really can vary depending on the size of the system that someone’s wanting to put in so you want to make sure you know your site costs. These are important if you’re ready to buy land to evaluate the land cost so make sure you know that. 

Scroll through all of your costs to confirm they all tally up. You have your build cost, soft cost, and site costs, then these all add up to your total cost so make sure you are clear on that.

Enter Into a Design Agreement for Your Home Build or Remodel

Talk to your builder to make sure you get everything into writing as far as what’s going to happen. There will be some type of agreement. Typically, we’ll enter into a design agreement to start the process. A lot of work is done on the front end, unless you’re working with a production builder then it’s not as extensive, they just have options that you could pick and they can give you exact prices. The actual plans and design for a custom home take time so there’s typically a letter of intent or design agreement on the front end, so be ready to pay that whenever you start building. Before you start building though you want to get clear on all the things your builder will do including how they are charging you and how you can look at their cost breakdown and understand it.

Locations In Middleton, ID and Ramona, CA

I hope that helps you out if you have more questions about this feel free to view our website such as our resources tab or leave us a voicemail message located on the right-hand side of your screen and we’ll be happy to help you. Our headquarters is in Middleton, Idaho and we have another office in Ramona, California. Thank you so much and have a wonderful rest of your day.

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