The Build Contract

In order to close on our construction loan, we had to finalize our Build Contract with Shaun. Shaun’s goal had always been to both design our house as an architect and build it as a general contractor. We had already signed the design contract with him. We split up the design part of the process and the build part of the process so that we could shop for other builders if we wanted to.

Now, the fiscally responsible thing to do may have been to shop our plans to a variety of other builders to solicit bids and weed out our options. Particularly since Shaun’s design/build operation was relatively new to the Summit County residential construction scene. And he didn’t yet have long-established relationships with reliable and reasonable subcontractors. But here’s the thing about financial decisions, and particularly financial decisions involving houses and long-term relationships — sometimes it’s not just about dollars and cents. It’s also about trust and stress.

At the end of the day, we trusted Shaun (I don’t mean this to foreshadow some sort of future betrayal “WE TRUSTED YOU….”). Our goals seemed to be aligned. He understood what we wanted from the house. And we liked working with him. So we didn’t shop the plans around.

Structuring the Build Contract

Speaking of aligned goals, there are a few different ways residential build contracts are usually structured. The first, and probably most common, is usually called a “cost plus” contract. In a cost plus contract, the builder usually agrees to build your house for whatever it costs the builder. Including materials, subcontractors, etc., plus a percentage of additional profit – usually something like 10%-20%.

When it comes to incentives, the homeowner’s interest in limiting spending is at odds with the builder’s financial interests, since the builder makes an additional dime for every additional dollar they spend.

Alternatively, some builders will offer a “fixed-price” contract. A fixed-price contract is what it sounds like: a promise from the builder to buy the house described in the plans for a fixed price of $X. If it ends up costing the builder more than $X, the builder eats the excess cost. If it costs the builder significantly less than $X to build the house, the builder enjoys the additional profit.

At first glance, the fixed-price contract seems to align the builder’s interests and the homeowner’s interests a little better. But the structure also incentives the builder to cut corners in order to build the cheapest possible house that fits the plans, so that the builder can enjoy the additional profit.

In the end, our contract with Shaun looks like a bit of a hybrid – a fixed-profit contract. It’s styled so that Shaun’s build profit starts as a fixed percentage of our budget – here, 10%. But it doesn’t “float” in the event we run over-budget — it’s a fixed number.

Additionally, due to input from U.S. Bank, we also restyled the contract to provide for a “Fixed Fee Sum” of our $630k budget plus a $60k contingency, for a grand total of $690k. The fixed fee included exceptions in the event we found subsurface soil conditions different from those described in our soil survey. So really, it was another hybrid – a little like a cost-plus contract, and a little like a fixed price contract.

Overall, the figures involved made me a little queasy. But looking around at other houses in Summit County, it seemed like if Shaun could deliver what he promised at the price we were paying, we’d be money ahead.