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