General Contractor cost plus - shenanigans?

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LoveTheBogle
Posts: 108
Joined: Tue Aug 13, 2019 5:53 pm

General Contractor cost plus - shenanigans?

Post by LoveTheBogle »

I am seriously considering building a custom home. As part of due diligence I have spoken to several general contractors as well as owners who are currently building. So far everyone I have spoken with, whether contractor or owner using a contractor, the common denominator right now is “cost plus” contracts. No one will do a flat bid.

I’ve been told numbers from 12% to 15% for cost plus. I’ve also been given numbers for price per sqft of $200 all the way up to $400 sqft for a particular style and sqft home.

I don’t quite understand it completely on a range where the high is twice as much as the low. Why would one contractor be $200 while another be $400 if they go off of “cost plus”? Certainly I understand that there are a billion decisions to make during the process and really the sky is the limit but still I would have figured the answer would be fairly uniform such as “$250 usually but I’ve had clients go nuts in (kitchen, master, etc) so it can run up to $400 if you go nuts on everything.” I didn’t get a single answer like this. Each contractor without any hesitation gave a specific number between 200 to 400.

One contractor who has built dozens of nice custom homes in the area and who was on the lower side of the range said “there are ways other contractors make a lot more off of you besides what you see”. He wouldn’t be specific and maybe he is playing games but what I’m thinking is that a contractor can get kick backs from sub-contractors. For example if your lumber is $100,000 and it is cost plus 15% then you would pay $115,000. The sub-contractor bid $100,000 but it was really $90,000 with a $10,000 kickback to the general contractor. So in this single $115k line item the builder didn’t make 15k as you may have thought but rather made 25k. Is this possible or even normal/common?

Any direct personal experience from building, or if you are a residential custom home builder, what experiences do you have? Sure subs can come in with wildly different prices as well but shouldn’t a good general contractor keep their subs honest and competitive by obtaining several bids for the higher price line items?

Why would there be a 2x difference between low and high dollar figure verbally stated by a contractor if the plans are the same and doing cost plus with similar percentage (12 to 15%)?. :confused
j9j
Posts: 150
Joined: Sat Oct 24, 2015 1:46 pm

Re: General Contractor cost plus - shenanigans?

Post by j9j »

I think you are on point with your thinking and example. It will be near impossible to fully know all the shenanigans. Depending on your budget, hire an independent inspector and architect to perform due diligence.
hachiko
Posts: 369
Joined: Fri Mar 17, 2017 1:56 pm

Re: General Contractor cost plus - shenanigans?

Post by hachiko »

No real way to know unless you get two or three more bids.

It's possible one is way overbidding or one is way underbidding and all the other bids come in at one of the two ends (though in the current environment I think the former is much more likely).

It's also possible you just happened to pick two contractors that were on way opposite ends, and the next 3 you get quotes from come in around 300.

General contractors are generally pre-selling services of people they do not control. So there could be any number of reasons why prices, even in a cost plus arrangement, are significantly different.

Also, just to clarify, I assume this isn't just cost of materials plus 15%, but that the cost of the subcontractor labor would be included in the cost subject to markup, which can definitely explain wide swings in quotes.
SgwayMontrose
Posts: 34
Joined: Sat Oct 19, 2019 1:19 pm

Re: General Contractor cost plus - shenanigans?

Post by SgwayMontrose »

Kickbacks like that would be an odd occurrence. The differences are there because some GCs need the work more than others and some have a better grasp on the actual market right now. Get your plans and have GCs the architect knows submit bids to you, if they are willing. The GC has to send the plans out to subs as they don’t know what subs charge except in a general sense. Many GCs and subs right now aren’t competitively bidding due to the quantity of work. Building doesn’t have “off the shelf” pricing, it is more of “what the market will bear”. Find a a reputable Gc and bite the bullet if you can’t get multiple bids. It’s going to be a stressful process regardless.
Oreamnos
Posts: 113
Joined: Tue Jan 07, 2014 1:27 pm
Location: Oregon - Portland and Bend

Re: General Contractor cost plus - shenanigans?

Post by Oreamnos »

We are just getting going on the construction of a new custom house (foundation poured, starting on initial floor construction). This is in Central Oregon, in a market where getting access to contractors & subs is pretty competitive. For 10+ years we've been paying attention to the various commonly-utilized custom home builders in the area, checking out every house we could, and talking to every client we could find. In our particular area, the majority of the houses like ours have been built by maybe 6 or 7 specific builders. We eventually met with and "interviewed" 4 of them, and then committed to work with one (whom we already knew was probably going to be the one, based on many things we'd observed, and based on the fact that we couldn't find a prior client who didn't absolutely rave about their experiences with him). His cost plus rate is 13% (usual range is 13-17% in our area).

NOBODY does fixed bids for a custom house in the current climate. Most of these builders never did fixed bids in the "before times", and there's no way they'd do it now. Costs are simply changing too quickly and unpredictably.

To a large extent, we picked our particular builder because we have observed over the years that his houses are "nice", but not "too nice". Most of the other builders were clearly a little more "high end", and their typical construction costs reflect that. In the early phases of planning with our builder, the only cost discussions consisted of me asking "So, with the majority of the houses that you've built over the last couple of years, what's the very rough typical range of cost per square foot?". He was willing to say "Oh, mostly $270-280, although there have been exceptions when people want specific things." When we met with the other builders, their answers were mostly like "Oh, $350 to $400, and sometimes higher". Those other builders are known for doing things a little "fancier", and our builder is known for doing decent but not over-the-top" construction. I think there's a good chance that the cost variation you're seeing is largely due to the variety of finishes and materials and detailing that's typical done by different builders.

Our builder has very strong and long-term relationships with his various subs, and they all seem to love working with him. We have no way of knowing if there are any shenanigans of the type you mentioned, but I must admit I've wondered about the possibility (not because I've seen any evidence, just curious). Ultimately, the house we want will have a cost, and it's up to us to decide if that cost is worth it to us. Sure, I could play GC myself, and go out and try to get a bunch of bids from a bunch of subs for everything, after specifying all the details. But in this climate, I'm sure I couldn't even get their attention, and their pricing to me would likely be higher than what our builder could arrange as part of his normal flow of business through them.

Having toured a number of the other houses built by our guy, we basically told him "Yeah, this is about the level of finishes we're looking for", and he then bid our job using similar materials and finishes and features. He got bids from all of his usual subs for that, and then he shared those bids with us. He didn't get competing bids; he just went to his usual partners. Some of them had good itemization, and some did not. It's the ones with no to poor itemization that give me pause. How can I possibly be comfortable with a bid that simply consists of one number, without any backing details? Well, I just had to get past that, and put some trust in our builder that he's not helping screw us over. That said, I'm paying close attention to every detail, and questioning things, and suggesting changes occasionally that help control costs, and so on. As we go along, I'm REALLY watching closely for any signs that the actual billed costs are straying significantly from the bid amounts.

Doing a cost plus house build in the million dollar range, where you have limited insight into all of the cost details, or how those compare to what might be possible with different subs, or with a different design, and with variability in material costs and availability, and with constrained subs availability, requires a pretty significant leap of faith. Exciting and terrifying.
hotscot
Posts: 407
Joined: Wed Feb 01, 2012 11:05 am

Re: General Contractor cost plus - shenanigans?

Post by hotscot »

Cost plus?
Walk away from it if it's in a contract.

Generally though any new construction will be cost plus 25%-50% after choices. Never less. (You don't want that basic cooker/toilet/fireplace/tile/bathtub?)
It all adds up.

Budget for it.

(And be on top of lien releases. And make sure any contractor has references/license/surety bond.)
Topic Author
LoveTheBogle
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Joined: Tue Aug 13, 2019 5:53 pm

Re: General Contractor cost plus - shenanigans?

Post by LoveTheBogle »

Oreamnos wrote: Sat Nov 20, 2021 1:28 am Those other builders are known for doing things a little "fancier", and our builder is known for doing decent but not over-the-top" construction. I think there's a good chance that the cost variation you're seeing is largely due to the variety of finishes and materials and detailing that's typical done by different builders.
This would be a reason for the large range.
hachiko
Posts: 369
Joined: Fri Mar 17, 2017 1:56 pm

Re: General Contractor cost plus - shenanigans?

Post by hachiko »

SgwayMontrose wrote: Sat Nov 20, 2021 1:16 am Kickbacks like that would be an odd occurrence. The differences are there because some GCs need the work more than others and some have a better grasp on the actual market right now. Get your plans and have GCs the architect knows submit bids to you, if they are willing. The GC has to send the plans out to subs as they don’t know what subs charge except in a general sense. Many GCs and subs right now aren’t competitively bidding due to the quantity of work. Building doesn’t have “off the shelf” pricing, it is more of “what the market will bear”. Find a a reputable Gc and bite the bullet if you can’t get multiple bids. It’s going to be a stressful process regardless.
I agree with this. There's no need to play games with a direct kickback that can get the parties into trouble if caught. There are many ways that a higher bid can benefit the GC down the line. If a GC can get a high bid for their subcontractor approved, that subcontractor may be more willing to offer the gc a lower quote on another project and/or choose to work with that gc on a future project instead of another gc even if bids are the same. And GCs are often competing with other GCs for the same subs, so a GC having priority with their subs over other GCs can be extremely valuable in this environment.
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Sandtrap
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Re: General Contractor cost plus - shenanigans?

Post by Sandtrap »

LoveTheBogle wrote: Fri Nov 19, 2021 10:16 pm I am seriously considering building a custom home. As part of due diligence I have spoken to several general contractors as well as owners who are currently building. So far everyone I have spoken with, whether contractor or owner using a contractor, the common denominator right now is “cost plus” contracts. No one will do a flat bid.

I’ve been told numbers from 12% to 15% for cost plus. I’ve also been given numbers for price per sqft of $200 all the way up to $400 sqft for a particular style and sqft home.

I don’t quite understand it completely on a range where the high is twice as much as the low. Why would one contractor be $200 while another be $400 if they go off of “cost plus”? Certainly I understand that there are a billion decisions to make during the process and really the sky is the limit but still I would have figured the answer would be fairly uniform such as “$250 usually but I’ve had clients go nuts in (kitchen, master, etc) so it can run up to $400 if you go nuts on everything.” I didn’t get a single answer like this. Each contractor without any hesitation gave a specific number between 200 to 400.

One contractor who has built dozens of nice custom homes in the area and who was on the lower side of the range said “there are ways other contractors make a lot more off of you besides what you see”. He wouldn’t be specific and maybe he is playing games but what I’m thinking is that a contractor can get kick backs from sub-contractors. For example if your lumber is $100,000 and it is cost plus 15% then you would pay $115,000. The sub-contractor bid $100,000 but it was really $90,000 with a $10,000 kickback to the general contractor. So in this single $115k line item the builder didn’t make 15k as you may have thought but rather made 25k. Is this possible or even normal/common?

Any direct personal experience from building, or if you are a residential custom home builder, what experiences do you have? Sure subs can come in with wildly different prices as well but shouldn’t a good general contractor keep their subs honest and competitive by obtaining several bids for the higher price line items?

Why would there be a 2x difference between low and high dollar figure verbally stated by a contractor if the plans are the same and doing cost plus with similar percentage (12 to 15%)?. :confused
Without getting too myopic in construction estimating details, here's an overview that might help.

Steps:

1. Work with a reputable licensed architect for:
a) detailed plans (blueprints) for the custom home you want on the building lot you have.
b) very detailed "specs" containing products to be used (brand/model), descriptions of proper installation in any areas that might be questionable, IE: tile install patterns, bathroom layout details, etc, paint brand and type and application, fixtures (brands/model and where installed), etc, etc.
c) To review and modify as needed and construction contracts / bids/offers that you get.

2. Realize that your construction (legal) package to bid on includes:
a) The graphic plans/blueprints
b) The "specs" , in a binder given out to all G.C. bidders.
c) The construction contract: includes payment schedule, retainage, etc, etc.
. . . .1) This might also include a projected "project management flowsheet" if the project is extensive $$$$, and more.

3. Either contact at least 3-4 reputable licensed insured bonded G.C's custom home builders (that's what they do) and give them the bid package. . or. . .

4. Contract with your architect to handle everything, be responsible for everything, oversight, transparency, etc.
(here, you only deal with the architect, not the G.C., not the subs, etc. Similar to hiring legal counsel).

5. As far as "how a construction estimate" is arrived at by the G.C. regarding markups, etc, etc, that is an "art" and varies greatly depending on the G.C. To you, what matters, much like buying a car, is the OTD (out the door) price. What is it going to cost you. By doing this, and also ensuring the "bid package" is bid apples to apples, you have a fair comparison between G.C.'s, etc.

6. You can also take your entire "bid package" and consult with various other architects to compare prices to handle the whole thing. So, up front, you agree with an architect to pay per hour or flat to make up your bid package (plans/specs), or, from the "get go" contract with an architect to handle everything.

7. Of course, whether various aspects of the project are paid for; cost plus, or by margin, or other, is going to have to be weighed against the higher up front known cost of a lump sum (complete price) package.
*Do not accept the fact that everything is done now as "cost plus", etc, until you've gotten bids from every G.C. etc, in your area no matter how many. Otherwise, that generalization (aka "asssumption") is not to your benefit.
How a project is estimated also depends greatly on the nature of the project. Some custom home builds are full of unpredictables and unrealistic expectations perhaps, and so forth. Some are straightforward.
IE: a simpler structure design built on a level slab on grade on a flat lot with easy access, etc, etc,
IE: VS. . .a fully custom multi million dollar custom contemporary "creative" home built on a mountain slope with extensive site work, and multi split level, etc, etc. (I know of a recent build like this that took 2-3 years to complete, starting project contract was 2.5 mil. Ending price was 3.7 mil. Fully architect contracted)

8. Of course, keep in mind and do keep shopping for "as built" homes in your area that might also fit your needs as an "as built" might give you far more value per dollar and also eliminate the stress and unknown costs of a custom build.

j :D
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RetiredCSProf
Posts: 741
Joined: Tue Feb 28, 2017 4:59 pm

Re: General Contractor cost plus - shenanigans?

Post by RetiredCSProf »

I had a very bad experience with a cost-plus contract for a major remodel, where I used a licensed GC. A few lessons learned:
- Have an attorney review the contract before you sign it
- Have an architect (not connected to the GC) draw the plans
- Read all the consumer advice offered by your state's Contractor State License Board (CSLB) and check license status of all trades who will work on the project
- Get multiple bids from GCs before having any GC submit the plans for a permit
- Insist on having a detailed, line-item bid referenced in the contract; e.g., do not assume that simply having a conversation with the GC about wanting hardwood floors will mean that this will be included in the contract price
- Insist that all exclusions are itemized; e.g., if fabricating and installing countertops will generate a change order, make sure you know that in advance
- Insist that the GC include in the contract a list of all subcontractors who will be working on the job -- their name, company, license#, address, and worker's compensation insurance coverage
- Ensure that your GC has adequate worker's comp insurance coverage for their employees (if any)
- Plan to purchase fixtures and other items, as much as you can, directly from vendors to control the costs

The only way to ensure that the GC charges no more than the agreed-on price is to insist on receiving invoices for all materials and all labor used on the project.

Here are two examples where the GC stretched the cost (this is just a small fraction of what happened):
1) The GC estimated 5 loads of debris from demolition to be hauled to the dump, at a cost of $800 each plus a 20% contractor fee (for his work in calling the demo company to show up with their truck). The GC gave me a change order for one additional load. I paid $5760 for 6 trips to the dump. During litigation, the GC produced checks that showed he had paid $400 per load for the 6 trips to the dump -- I should have been billed $2880.

2) The GC gave me a change order (two months after the work was performed) for one extra day of interior painting (one unlicensed painter and his assistant). The extra day was needed because I asked for a change in the paint color. I was billed $1800 for the one day (two painters, 8 hours each). Paperwork uncovered during litigation showed that the GC paid the painters at most $20 per hour. That is, I should have been billed at most $320 (plus ktr fee) for the extra day of painting. Did the painter get the extra money? Unlikely.
chet96
Posts: 134
Joined: Fri Feb 21, 2020 9:14 am

Re: General Contractor cost plus - shenanigans?

Post by chet96 »

RetiredCSProf wrote: Sun Nov 21, 2021 10:31 pm I
- Have an architect (not connected to the GC) draw the plans
This is a nightmare. I called a few architects about a renovation (to me anyway, $150+k). The only one who returned the call said that "nobody" would put their license on the line for a residential job, and that I was stuck working with a designer. (Essentially a draftsperson who would do the drawings for the builder and walk away).

This seemed odd to me, as I really want to avoid the scenario described above. Maybe a regional practice?
SubPar
Posts: 143
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Re: General Contractor cost plus - shenanigans?

Post by SubPar »

LoveTheBogle wrote: Fri Nov 19, 2021 10:16 pm I am seriously considering building a custom home. As part of due diligence I have spoken to several general contractors as well as owners who are currently building. So far everyone I have spoken with, whether contractor or owner using a contractor, the common denominator right now is “cost plus” contracts. No one will do a flat bid.

I’ve been told numbers from 12% to 15% for cost plus. I’ve also been given numbers for price per sqft of $200 all the way up to $400 sqft for a particular style and sqft home.

I don’t quite understand it completely on a range where the high is twice as much as the low. Why would one contractor be $200 while another be $400 if they go off of “cost plus”? Certainly I understand that there are a billion decisions to make during the process and really the sky is the limit but still I would have figured the answer would be fairly uniform such as “$250 usually but I’ve had clients go nuts in (kitchen, master, etc) so it can run up to $400 if you go nuts on everything.” I didn’t get a single answer like this. Each contractor without any hesitation gave a specific number between 200 to 400.

One contractor who has built dozens of nice custom homes in the area and who was on the lower side of the range said “there are ways other contractors make a lot more off of you besides what you see”. He wouldn’t be specific and maybe he is playing games but what I’m thinking is that a contractor can get kick backs from sub-contractors. For example if your lumber is $100,000 and it is cost plus 15% then you would pay $115,000. The sub-contractor bid $100,000 but it was really $90,000 with a $10,000 kickback to the general contractor. So in this single $115k line item the builder didn’t make 15k as you may have thought but rather made 25k. Is this possible or even normal/common?

Any direct personal experience from building, or if you are a residential custom home builder, what experiences do you have? Sure subs can come in with wildly different prices as well but shouldn’t a good general contractor keep their subs honest and competitive by obtaining several bids for the higher price line items?

Why would there be a 2x difference between low and high dollar figure verbally stated by a contractor if the plans are the same and doing cost plus with similar percentage (12 to 15%)?. :confused
I'll try to not go nuts on this, but I lead the financial function for a multi-family real estate developer/general contractor. We don't do single family residential/custom homes, so there may be some differences there and take the proceeding with a saltlick. Most of our projects are Cost+. We're an "open book" GC, meaning we'll provide our client's significant transparency into our projects we're building for them...within reason.

Beyond material costs, a GC's subcontractor network can have a significant impact on project costs. If GC's awarding bids to subcontractors that are paying their people under a 1099 arrangement (the legality/morality of which I will not address, but suffice it to say it's unfortunately not an uncommon practice) that sub can bid low since their labor costs are lean. Obviously, it doesn't take a mathematician to know that foregoing OT wages, health/unemployment/worker's compensation insurance, retirement benefits, etc., will yield lower labor costs than a subcontractor that's employing skilled tradespeople under more formal employment arrangement.

In our industry, GCs will often charge a percentage of the cost of work for insurance coverage. There's usually margin baked into that number. Similarly, a GC can bill management/supervisory labor out at a rate that has some embedded margin. So, yes, you can technically "hide" profit. That said, those type of items should be quoted in the contract (e.g., we'll outline the rate at which insurance will be charged, how much we bill our people out at hourly, etc., but I won't produce payroll records or insurance premium statements if requested). Additionally, because a Cost+ technically incentivizes a GC to spend more (thus increasing fee), most of our contracts include a shared savings provision -- meaning, we keep a cut of any unspent project contingency at the end of the project. And, I don't doubt that it happens, but bid-rigging, kickbacks, etc. it's not an industry norm. That's sketchy and definitely not above-board IMO.

If you have any other specific questions, happy to share any of my personal experiences. There are several other knowledgeable posters, too.
RetiredCSProf
Posts: 741
Joined: Tue Feb 28, 2017 4:59 pm

Re: General Contractor cost plus - shenanigans?

Post by RetiredCSProf »

A designer can prepare the plans that will be submitted to the city for permit. I will do this next year for one small bathroom remodel (<$50K). Check with your local planning board to confirm. If you are making structural changes (moving walls, staircases), I think it would be best to have someone knowledgeable in architecture and structural engineering to prepare the plans.

For my major renovation, I started with the GC, who brought in his architect-friend when I said I wanted the work to be permitted. My mistake in having the architect and GC work "hand-in-hand" is that the project became a design-build process, which eliminated the possibility of getting bids from multiple GCs. In fact, the GC turned the architect into his "employee" by charging a 20% contractor fee on top of the architect's bills. This made the GC the "expert" on the design as well as the implementation -- he could not blame any design errors on the architect.
mcraepat9
Posts: 1676
Joined: Thu Jul 16, 2015 11:46 am

Re: General Contractor cost plus - shenanigans?

Post by mcraepat9 »

Sandtrap wrote: Sun Nov 21, 2021 8:06 am
LoveTheBogle wrote: Fri Nov 19, 2021 10:16 pm I am seriously considering building a custom home. As part of due diligence I have spoken to several general contractors as well as owners who are currently building. So far everyone I have spoken with, whether contractor or owner using a contractor, the common denominator right now is “cost plus” contracts. No one will do a flat bid.

I’ve been told numbers from 12% to 15% for cost plus. I’ve also been given numbers for price per sqft of $200 all the way up to $400 sqft for a particular style and sqft home.

I don’t quite understand it completely on a range where the high is twice as much as the low. Why would one contractor be $200 while another be $400 if they go off of “cost plus”? Certainly I understand that there are a billion decisions to make during the process and really the sky is the limit but still I would have figured the answer would be fairly uniform such as “$250 usually but I’ve had clients go nuts in (kitchen, master, etc) so it can run up to $400 if you go nuts on everything.” I didn’t get a single answer like this. Each contractor without any hesitation gave a specific number between 200 to 400.

One contractor who has built dozens of nice custom homes in the area and who was on the lower side of the range said “there are ways other contractors make a lot more off of you besides what you see”. He wouldn’t be specific and maybe he is playing games but what I’m thinking is that a contractor can get kick backs from sub-contractors. For example if your lumber is $100,000 and it is cost plus 15% then you would pay $115,000. The sub-contractor bid $100,000 but it was really $90,000 with a $10,000 kickback to the general contractor. So in this single $115k line item the builder didn’t make 15k as you may have thought but rather made 25k. Is this possible or even normal/common?

Any direct personal experience from building, or if you are a residential custom home builder, what experiences do you have? Sure subs can come in with wildly different prices as well but shouldn’t a good general contractor keep their subs honest and competitive by obtaining several bids for the higher price line items?

Why would there be a 2x difference between low and high dollar figure verbally stated by a contractor if the plans are the same and doing cost plus with similar percentage (12 to 15%)?. :confused
Without getting too myopic in construction estimating details, here's an overview that might help.

Steps:

1. Work with a reputable licensed architect for:
a) detailed plans (blueprints) for the custom home you want on the building lot you have.
b) very detailed "specs" containing products to be used (brand/model), descriptions of proper installation in any areas that might be questionable, IE: tile install patterns, bathroom layout details, etc, paint brand and type and application, fixtures (brands/model and where installed), etc, etc.
c) To review and modify as needed and construction contracts / bids/offers that you get.

2. Realize that your construction (legal) package to bid on includes:
a) The graphic plans/blueprints
b) The "specs" , in a binder given out to all G.C. bidders.
c) The construction contract: includes payment schedule, retainage, etc, etc.
. . . .1) This might also include a projected "project management flowsheet" if the project is extensive $$$$, and more.

3. Either contact at least 3-4 reputable licensed insured bonded G.C's custom home builders (that's what they do) and give them the bid package. . or. . .

4. Contract with your architect to handle everything, be responsible for everything, oversight, transparency, etc.
(here, you only deal with the architect, not the G.C., not the subs, etc. Similar to hiring legal counsel).

5. As far as "how a construction estimate" is arrived at by the G.C. regarding markups, etc, etc, that is an "art" and varies greatly depending on the G.C. To you, what matters, much like buying a car, is the OTD (out the door) price. What is it going to cost you. By doing this, and also ensuring the "bid package" is bid apples to apples, you have a fair comparison between G.C.'s, etc.

6. You can also take your entire "bid package" and consult with various other architects to compare prices to handle the whole thing. So, up front, you agree with an architect to pay per hour or flat to make up your bid package (plans/specs), or, from the "get go" contract with an architect to handle everything.

7. Of course, whether various aspects of the project are paid for; cost plus, or by margin, or other, is going to have to be weighed against the higher up front known cost of a lump sum (complete price) package.
*Do not accept the fact that everything is done now as "cost plus", etc, until you've gotten bids from every G.C. etc, in your area no matter how many. Otherwise, that generalization (aka "asssumption") is not to your benefit.
How a project is estimated also depends greatly on the nature of the project. Some custom home builds are full of unpredictables and unrealistic expectations perhaps, and so forth. Some are straightforward.
IE: a simpler structure design built on a level slab on grade on a flat lot with easy access, etc, etc,
IE: VS. . .a fully custom multi million dollar custom contemporary "creative" home built on a mountain slope with extensive site work, and multi split level, etc, etc. (I know of a recent build like this that took 2-3 years to complete, starting project contract was 2.5 mil. Ending price was 3.7 mil. Fully architect contracted)

8. Of course, keep in mind and do keep shopping for "as built" homes in your area that might also fit your needs as an "as built" might give you far more value per dollar and also eliminate the stress and unknown costs of a custom build.

j :D
+1

I am always impressed with Sandtrap's posts involving construction matters. Hits the nail on the head everytime!
Amateur investors are not cool-headed logicians.
CurlyDave
Posts: 2935
Joined: Thu Jul 28, 2016 11:37 am

Re: General Contractor cost plus - shenanigans?

Post by CurlyDave »

LoveTheBogle wrote: Fri Nov 19, 2021 10:16 pm
...Any direct personal experience from building, or if you are a residential custom home builder, what experiences do you have? Sure subs can come in with wildly different prices as well but shouldn’t a good general contractor keep their subs honest and competitive by obtaining several bids for the higher price line items?

Why would there be a 2x difference between low and high dollar figure verbally stated by a contractor if the plans are the same and doing cost plus with similar percentage (12 to 15%)?. :confused
I am writing this reply from the study of our custom-built retirement home which was completed about 15 years ago. I am in general agreement with Sandtrap who has great construction experience. My own background and experience is that I am a Ph.D Chemical Engineer, with a minor in Mechanical Engineering, and at the time of the build had 35+ years experience in project management for major corporations. Essentially I managed construction of pilot plants, factories, and miscellaneous products. I had also built two houses acting as an owner-builder. I was far from naive in the whole process.

It is almost impossible to build a real custom home on a tight budget. Our construction came in about 50% over the initial estimates and for much of the build, I was retired and living in an RV on the same property as the construction. I could see exactly what was happening every single day, but there were still overruns in almost every instance.

If you want greater cost certainty you are far better off to buy a "spec" home from an experienced builder. ("Spec" means speculation in this instance. Frequently good builders will acquire a lot and build a home on it, placing it up for sale when it is 60-80% finished.) Sometimes these homes will be called semi-custom. The builder has already done the floor plan, the site location, and that stuff. You get to choose appliances, finishes, flooring, etc.

We had acquired the lot already and had some very specific requirements for the home. All my life I had wanted to have a view home and we found a nice lot where we could have a custom home with a great view built. The second thing was that since it was a retirement home we wanted it completely handicap accessible, and thirdly we wanted a guest suite for children and grandchildren to visit and stay.

One thing Sandtrap did not cover, but which I can highly recommend from our experience, is before selecting a contractor get your construction loan in place. We went through a small local bank and had them recommend some local contractors. Think about this for a minute. The bank has a lot more experience with local contractors than any individual customer. They have a strong interest in having their customers be satisfied. Plus, they have significant leverage over the contractors. If a contractor screws up the bank can just refuse to lend on his future projects. This will hit him where it hurts -- right in his business income.

The bank frequently has its own construction inspectors who will inspect progress before releasing monetary draws to the contractor. They are not a substitute for your own inspections, or the building department inspector, but they are another layer of safeguards against the many problems that can arise.

Even if you have 100% of the cash for the build in your account, it is worth the costs to get a construction loan and enlist a local bank as what is essentially a project overseer on your home build.

Another issue to consider is that in addition to buying the property ahead of time, I completely worked out the floor plan, two stories with a residential elevator. All designed to take advantage of the site. This was not just lines on a piece of paper, it was generated on a computer using a real drafting program with everything to scale. Both plan and elevation views. This is not a brag, it is to say that unless you have very strong reasons for wanting a specific floor plan you will probably be far better off buying a spec home in the 60-80% completion range where professionals have worked out the floor plan and you can walk through the framed house and see if it works for you. For most people, the contractor and architect have years of experience and are very good at visualizing the 3-dimensional structure the plans will produce. The customer is generally a rank amateur at this and very significant misunderstandings can arise.

I could show the contractor we chose the floor plan for estimating purposes, and he helped us find an architect to make final drawings based on my plan.

Having a custom home built is not for the faint of heart or the light of wallet. If you have strong reasons for wanting one, go for it. But if you just want something that is much nicer than average, semi-custom is a much better value.
Answering a question is easy -- asking the right question is the hard part.
sbillertpa
Posts: 32
Joined: Sun Mar 18, 2018 9:22 am

Re: General Contractor cost plus - shenanigans?

Post by sbillertpa »

We are in the process of building a one story, extremely modern (think Miami with flat roof) 3,200 SF home, in Tampa, FL. In mid-2019 we selected a builder and independently signed a design agreement with our GC’s brother who was a semi-retired architect who designs a lot of modern homes. The experience with the architect was good although it took us approximately 6+ months to get to a permitted set of plans with the City of Tampa. The real issue was that our contract with the builder/GC was cost plus 18% and his estimates were across the board too low. Couple his underbids with COVID-19 and you have a recipe for disaster. Our initial build cost with our construction loan sat at $244/SF. This May we decided to execute our termination for convenience clause with our builder/GC after experiencing significant challenges with the build. Our out of pocket costs to our former builder/GC was $75k or $23/SF. We selected a new builder, slightly larger GC than our former builder, who agreed to take over our builder using similar terms (Cost Plus 18%). The new GC spent approximately 6 weeks putting together an extremely detailed estimate of what it was going to take to finish our build under current labor and material conditions. We decided to go back to our bank/credit union to ask for a refinance to pay for some of the cost growth. The new build cost is $347/SF. We probably could have completed the build with our former builder for ~$325/SF but the quality and experience with the new builder will be significantly better. When you look at the price per SF, keep in mind that our house has pretty high end finishes and building in Tampa, FL is expensive because of flood & hurricane requirements.

Good luck,
Sam
Carguy85
Posts: 643
Joined: Thu Mar 19, 2020 6:26 pm

Re: General Contractor cost plus - shenanigans?

Post by Carguy85 »

We had our custom home built about 5 years ago...it was fixed cost with allowances for cabinets, lighting, flooring, etc. We interviewed 3 builders and chose the one with the most experience in the area. At the time I wanted to make sure we had as realistic of allowances as possible. We then spoke with some of his past clients...all very happy. We went over on cabinets but otherwise fairly predictable “on budget” process even with it being a bigger build of about 6700 sq ft (including unfinished basement). I will say I am very thankful we had extra cash on hand for all the misc stuff that came up in the next year...landscaping upgrades, generator, lightning rods, basement water mitigation improvements, radon mitigation, etc etc. 20-30% overrun was what I always heard when building a new home and after all is said and done turned out to be pretty true in our case even with a fixed price contract.
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