| 1. To Cost Plus or Fixed Bid?
Differences in Actual Costs of work performed by reputable contractors do not vary nearly as widely as people believe. What does vary widely is the array of bids or estimates that firms provide as a result of insufficient information or a lack of clear understanding of what is being specified. It is very difficult to provide an accurate costing without significant planning and discovery. The difference in the bid that covers for every contingency possible and the bid that loses the contractor monies can vary widely. It is in everyone’s best interest to understand and communicate what the expectations for a desired outcome are and to get comfortable that the firm that you have selected is capable to provide that outcome and earn a reasonable profit doing so.
Pros for homeowner |
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Cost Plus |
Fixed Bid |
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Understand costs & can manage where monies are spent |
Certainty in what costs will be incurred and what you will get for your investment. |
Enables you to delay some decision making and have flexibility in specifications |
Risk is shifted to the contractor to have detailed every conceivable cost and a method for charging for changes should they be required or requested. |
Homeowner has more flexibility to make changes |
Requires decision making about selections early in order to “fix” the cost. |
Allows for more fluidity in the budget |
Invokes a discipline to stick with the original budget. |
On the surface, this negotiated price gives the owner more control to identify the resources, the materials and the scope of work. |
Implies that the contractor is confident in his her ability to accomplish the scope of work on time and within the allotted budget. |
Best used with hands on homeowner who wants what they want and prefers to make decisions along the way instead of making the selections before start of construction. This scenario allows for more flexibility and, as a result, tends to be more costly unless the homeowner is very disciplined. |
Best used when homeowner feels they are at risk of making selections based more on what they want than what their budget dictates or what they need. |
Also, best choice when getting started immediately is a requirement and you don’t have the luxury of making all of the selections before the project start time. In this scenario, estimates can be provided when hard bids cannot be gotten due to a lack of information available. |
Hard bids are a requirement and so Fixed Bid work tends to start with about 80% or more of the planning completed before work starts. This often results in a more efficient process. Most people prefer the certainty of a fixed bid. People operating on tighter or smaller budgets, in particulare, tend to be more comfortable with a Fixed Bid. |
Cons: |
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Flexibility can enable a person who is not decisive to slow down their project’s progress and cause the budget to spiral out of control. |
It takes considerable time and effort to prepare a fixed cost bid. The contractor’s time to produce the bid is, necessarily, baked into the fixed bid. |
Time and material people often want what they want and, sometimes, forget about the correlation between changes and cost or changes and schedule or both. The tendency is toward scope creep and with an expectation that the schedule and original estimate stay in tact. This contract requires strong change management on the part of the contractor or relationships will become strained. |
Since the contractor must protect against the possibility of some contingencies, the fixed bid pricing tends to provide for “insurance” against the possibility against certain common threats. This can increase costs by up to 5%. On the other hand, if events occur that the builder did not account for, but are within the scope of the original work, then the builder risks having to absorb that cost. |
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A fixed bid requires that the contractor is financially sound to be able to endure, even if costs exceed the fixed price or if margins are less than expected. |
2. Price Per Square Foot? (provided by Mike Garabedian, http://blog.garabedianproperties.com/)
One of the hardest aspects of construction for home buyers to understand is how homes of similar size and room counts can have so many variances in their respective prices.
In one of my continuing education classes Steve Zbranek, our instructor, placed a very simple drawing on the board which helps illustrate the quandary homeowners face when reviewing pricing on their home.
Example - Please note the illustrations below. They are not to scale but you can see the differences in the exterior dimensions of the two structures.
Structure A measures 10’ x 10’ for a total size of 100 square feet in size. This creates a total of 40 linear feet of wall space.
Structure B measures 2’ x 50’ and also has a total size of 100 square feet. However it has 104 linear feet of walls. This is over 2 1/2 times as much linear footage in walls than Structure A.
If both of these structures are 8’ tall and were covered with bricks you would have approximately 1,600 bricks required to cover Structure A. However, even though Structure B is the same square footage in size, it will require over 2 ½ times as much brick (4,160 bricks) to cover Structure B’s exterior walls.
The Math - Assuming brick costs you $1 per brick (labor, material, brick costs, etc..), then Structure B will cost $2,560 more to have it covered in brick than Structure A.
This translates into an additional $25.60 per square foot of the structure for the additional brick. Remember both structures have the same square footage.
Even if Structure A was 15’ tall and Structure B was still only 8’ tall, the numbers are still not equal. It would require 3,000 brick to cover the 15’ walls of Structure A, which is still 1,160 bricks fewer than Structure B with 8’ walls. Structure B will still cost an additional $1,160 or $11.60 per square foot.
This is why building higher can often cost less than building out (larger footprint) when designing and building a home.
Cost Variances - Brick is not the only costs associated with an exterior wall, there is framing lumber, carpenter labor, insulation, bracing, house wrap, windows, roof bracing, gutters, paint, siding and the like. You will find that the variances we illustrated with brick will also hold same for these costs as well.
Numbers Need Facts - We share these examples to help illustrate why comparing builders/homes on per square foot pricing is seldom an accurate reflection of the value and costs associated with each structure. Designing and building a custom home is a very complex exercise and if some just throws you out a price without serious and detailed analysis of what you are hoping to accomplish, be prepared for surprises. And I am not referring to the type of surprise that makes you smile.
When you interview a custom home builder, spend time on understanding how they work and guide your family through the process. Their experience can help you understand how the design and layout of your home can create or save you on the costs of construction.
Real Life Example - One of the most illustrative examples I have shared with families is from two homes we built about 4 years ago. They were both about 5,400 sqft in size and had very nice finish out. However, due to the architecture, homeowner selections, floor plan and design elements, there was over $500,000 in price variance between the two homes. This excludes the land costs. That works out to $92 a square foot for homes of approximately the same size.
Small Changes Big Money - It can be frustrating for families to understand how small changes can affect the costs of their home. Experienced builders will avoid giving you a firm price on your home until they have final plans, complete specifications and all the inclusions accounted for and priced out.
Small changes such as moving a wall, redesigning a roof or adding windows can add thousands to a home without ever changing the size of the home. Even deleting some items can cost you more money, such as removing a wall that was designed to brace the roof.
Custom homes are very complex projects and although on paper a change or modification may seem simple, the reality can be much more involved. Don’t become blinded by the price per square foot trap. Give consideration to all aspects of the home, its amenities, location and design.
We were always taught that 2 + 2 = 4 but when building a new home sometimes 2 +2 = 9.
3. What is a Lein Waiver?
A lien waiver is a document from a contractor, subcontractor, materials man, equipment lessor or other party to the construction project (the claimant) stating they have received payment and waive any future lien rights to the property (of the owner). There are typically four types of lien waivers:
Conditional waiver on progress payment - The safest waiver for claimants, this waiver generally specifies that if they have indeed been paid to date (and that includes no return or stopped payment checks) the waiver is an effective proof against any lien claim on the property.
Unconditional waiver on progress payment - This waiver releases all claimant rights through a specific date unconditionally (and that includes no return or stopped payment checks).
Conditional waiver on final payment - This waiver releases all claimant rights to file a mechanics lien if they have indeed been paid to date (and that includes no return or stopped payment checks).
Unconditional final waiver final payment - The safest waiver for owners, this waiver generally releases all rights of the claimant to place a mechanics lien on the owners property unconditionally. It is immaterial if the payment check has been returned or stopped payment. Claimants should issue this type of release only when they are positive their work is done and the payment has cleared their bank. Owners should demand this release when they are paid in full.
Usually, having a lien recorded against your home means you can not sell it until the debt is paid. Construction liens are remedies created by statute to ensure payment to contractors, subcontractors, tradesmen, laborers or material suppliers who have improved the property of others. These liens provide home improvement contractors with a security interest in the homeowner’s property.
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