Know the Contract with Your Contractor

Rick Pullen, NMLS# 730843

building contractors

Homeownership has long been accepted as a core component of the American dream. For some, homeownership also means having a hand in crafting and designing their forever home. You have the opportunity to interview builders, and that is a crucial first step before the journey begins. Interviewing builders will allow you to have a closer relationship in the building process and decide who works with you to have their craftsmanship be a mark on the house you make your home. The interview process is just a small piece of the puzzle; the larger picture is the contract.

As for most contract work, you’d expect to sign a document demonstrating a commitment to pay for services rendered. Receiving a contract is the easy part. However, ensure you understand the legal aspect of your request. If you review a couple contracts though, you’ll see a vast difference in detail and particular wording that should prompt questions for your project as they can dramatically impact your ability to be financed, let alone the total cost.

What are Allowances?

Allowances provide guidance for the amount allotted for specific aspects of the build. This is helpful for the contractor to estimate the cost of a build while having some flexibility in final expense. Be sure to understand the detail of your contract, such as, whether or not you will pay the allowance amount or the actual cost of the materials/labor if they come in under the estimate. A contract should be familiar and comfortable for both parties. So remember, you may not get your cake and be able to eat it too.

What does Cost-Plus mean?

Due to the present state of the supply chain and rising costs the premise that a builder can offer a “fixed price contract” are nearly dead and gone. These contracts would quote a price and any overages in material costs would eat into the profit of your builder. Since materials were more readily available and prices were so unpredictable, these contracts gave confidence to the homeowner and experienced builders still were able to get their cut of the pie. Often, you’ll see a “Cost Plus Contract” for a new home build. This would mean that the Price at the top is contingent on material costs at the time of whipping up the document, which if you haven’t gathered, isn’t iron-clad anymore. Between material costs and labor availability, even the most skilled estimates are facing turbulence. Be sure to speak with your builder about possible price caps for specific allowances if possible, or, better yet, build in a contingency.

Why have a Contingency?

Peace of mind is worth the price. Finding out that those luxury windows you saw last spring are now 20% more expensive and the garage doors will take another 4 months to arrive can take years off your life, metaphorically. But realistically, it can severely impact your pocketbook if there isn’t a reserve line item of Contingency. Anywhere from 5%-10% is a great buffer to act as a safety net during your build. Once the bank approved the total loan amount, the only person able to cover unexpected costs is staring at you in the mirror, so ask your builder to review this option. Of note, any contingency funds not utilized during the build simply lessen the overall amount of your mortgage in the end, so it only presents a benefit.

Quality builders that operate with integrity and straight-forwardness won’t hesitate to disclose these details and will be happy to know you are interested as to head off any difficult conversations later in the build.

In this post-COVID environment it’s becoming more and more important to be well informed on the potential expense of your new build, and this is simply a sampling of items to be aware of while building your new home.



Rick Pullen, NMLS #730843

Construction & Consumer Banker