The process of building a home, part 2: Budget, builder selection, and contract types
Budget, builder selection, and contract types is part 2 in a series of 3.
A good way to start is: budget before design, This is a written set of guidelines prepared by the OPM that includes clear responsibilities and accountability for each member of the team, including the owners, leading to a guarantee of a realistic cost that is within the previously agreed upon budget.
Are the horror stories true that many projects are way over budget?
It is true that a huge percentage of dream home designs are significantly over the desired budget. Perhaps as many as 70% of designs are over budget, often by as much as 30% in cost. Even in luxury homes, budgets are a big consideration. Usually when this happens the next step is a harrowing process of “chopping things out” of the desired design, as well as compromising with lower level of quality in products and finishes. The trouble is, once the dream is visualized it is hard to imagine doing without. What typically happens is these items find their way back into the project as change orders during construction, which is much more costly in time and money.
The “chop” stage is, unfortunately, where green building features usually get eliminated, though that doesn’t need to be the case. It is possible to have a green home and stay within budget, if the plans are well coordinated from the start. An integrated approach to design and material selection can result in higher performance, fewer materials consumed, and stunning design.
So, how do I avoid the mess of losing synergy between designer and builder and running over budget?
Hiring people who will act as a team and making them accountable is the most important choice you will make, and can preempt most troubling scenarios. This is one of the OPM’s primary functions.
A key ingredient in pre-construction is value engineering–researching alternative methods and products that attain the design intent.
What contract type should I have with my builder, Time & Materials or fixed?
A Time and Materials contract is common and works well when there is trust and all members act as part of a team and owners want to be active participants during the construction process. If the design is complex or the site conditions are difficult, it is impractical to arrive at solid costs for many key parts of the work and a T&M contract is best. A hybrid option is fixed price for the site work and the shell, and a T&M price for the later finish choices. If enough of the finishes have been specified, the remaining items can be given agreed upon allowance figures so that a complete budget can be calculated.
Fixed price, or stipulated sum, is often erroneously referred to as fixed fee. This is where the contractor guarantees that he will complete the project as specified for a fixed total cost. This works well when design specifications are complete and site conditions allow for accurate pricing of the majority of the work. Fixed price is also advantageous when there is the desire (and it is practical) to get competitive bids. Fixed price also works best when the owners are more concerned with completion date and cost than being involved in the process.
The third choice is a hybrid of T&M and fixed price. This is where the cost of the work is on a T&M basis, but the contractor’s fee is fixed. This arrangement works well because the builder’s fee can be absent from all the following discussions of budget issues.
The major differences between T&M and Stipulated Sum:
- The team concept:
- In a T&M you form the team early to work together to update budgets, do value engineering, and contribute suggestions.
- In a Stipulated Sum you have to wait for plans to be completed and then have contractors price it. The true cost is not known until a month or so after plans are completed.
- Personal Involvement
- A T&M relationship should allow and even encourage all members of the team to contribute their expertise, from design development through construction.
- A stipulated sum contract is a hard line delineation where the owner has to have a hands off position.
- Documentation of costs, schedules, problems.
- A T&M contract can be open book where the owner and owner’s agent such as the architect are provided with as much documentation as they request.
- In a Stipulated Sum contract the contractor provides only progress billings paralleling the amount of work completed.
If I choose any of the T&M arrangements, how can I get competitive bids?
The combined cost subcontractor work and purchased materials is 70 to 80% of the total cost. The OPM and selected builder can get competitive bids from subs and suppliers once plans are developed enough to quantify these costs.