Key Takeaways:
- SoW for a custom construction project is never really 100% final
- Cost-Plus-Fee is a common agreement between owners and builders for custom construction projects and is designed to accommodate such ever-changing jobs.
- By definition, it is understood by all involved that the owner is responsible for all project costs under cost-plus fee agreements.
- Construction project specifications result in more accurate estimates, improved productivity, fewer procurement errors, and greater owner confidence.
- Written specifications provide everyone involved with clear and more detailed information.
Traditional Builders Cost to Build a Home
Any given construction project requires some combination of materials, labor, and equipment to complete: this is its “Scope of Work”. Builders will ascertain a Scope of Work (SoW) from the information available at the time—plans, material selections, job-site visits and meetings with the owner.
Next, they will cost the SoW and propose to perform the work for the owner under some form of contract and for some form of compensation. Ideally, the SoW is detailed and clearly defined.
When it is, builders can estimate the cost of the work more accurately and clarify exactly what they will propose to do. Their confidence in the information and their ability to perform the SoW empower them to take on all (or most) of the cost risk for the project and offer to do the job for a fixed price.
Custom Home Builders Cost to Build a Home
But custom construction projects are, well, custom. At any given point, they are subject to change. Put another way, at no point (before completion) is a custom project’s SoW completely and exactly defined.
Architectural and engineering plans are developed to define much of the Scope of Work for the project, but must often be adjusted to compensate for the actual circumstances in the field.
Architects also determine and specify many of the means, methods, and materials to be used in the building. However, they also want to allow for some flexibility, so some information is noted but purposefully left vague.
Other information—such as exact material selections—is not specified at all because it is unknown at the time, so it can’t be included in the builders’ estimated cost to build a home. Furthermore, changes—whether required or desired—inevitably and continually occur throughout the construction process.
All parties involved could take the time to determine and specify all of this unknown information, but doing so isn’t practical. For most owners, “time is of the essence”; they want to get their projects started and completed. So, to “fast-track” the project, builders become involved during design and development, working to price the job based on the information that can be determined at the time.
However, since the SoW for a custom construction project is never really 100% final, a builder can’t determine an exact cost for the job. Because they can’t determine an exact cost, they can’t offer to build the project for an exact fixed price. Simply put, a builder’s cost to build a custom home will always be undetermined until the project is complete.
A Cost-Plus-Fee (CPF) or Cost-Plus Construction Contract is a common agreement between owners and builders for custom construction projects with so many variable costs. CPFs are designed to accommodate such ever-changing jobs. However, CPFs shift most of the cost risk from the builder to the owner. This seismic shift completely changes how the project is priced and proposed by builders to owners.
With a CPF, it is understood by all involved that the owner is responsible for all project costs and that the actual costs for the builders to build a home will vary based on what the complete Scope of Work ends up being.
However, most owners take for granted that, even though the SoW is ill-defined, the pricing presented by one or more builders is more or less accurate. After all, these are reputable builders who’ve completed many custom projects—right?
Even a complete set of plans from the best architects will lack a considerable amount of information. Much of the SoW is still “to be determined.” Without this information, each builder is left to “fill in the blanks” (or not) themselves when pricing the job.
Generally, builders provide owners with a cost to build a home that reflects the available information at the time. However, they should also account for the unknowns, especially those they could reasonably discern using their expertise.
The problem? They don’t—or at least not very well.
Some builders do try to provide clients with good estimates for construction costs, but each builder approaches this differently. This inconsistency is one of the major reasons why the pricing that owners receive from different builders is often incomplete and varies significantly, further complicating matters for owners.
So, why don’t builders provide better estimates to clients? Do they lack the personnel or expertise to do so? Maybe. Are they unable—or hesitant—to invest the time required to develop a thorough estimate for a client who might not contract with them if the cost for those builders to build a home is too high? Possibly.
Most clients will want to contract with the builder offering the best overall pricing. A builder competing with others for the same project is often tempted to quote a low price.
These incentives encourage builders to keep their pricing as low as possible, and at this stage, they are empowered to do so. Including low budget amounts for parts of the SoW—or excluding them altogether—is an easy, justifiable way to provide a client with a “competitive” estimate.
Are builders purposefully using bait-and-switch tactics? Ultimately, no one except the builder can know for sure why they fail to provide clients with the comprehensive, accurate estimates they could and should.
The builder’s stance? They claim the cost to build a home that they provide can only be as good as the information issued to them for pricing.
The solution? Provide them with more, better information to determine construction costs.
How? By developing detailed, thorough written specifications.
NCHCC will develop a custom set of written base specifications for your home to supplement the plans during the bid process. These base specs will reference the project plans and reflect the job’s location, existing conditions (for remodels), and size. To realize the full value of written specifications, they must be done during the Pre-construction phase before contracting with a builder
NCHCC’s written specifications assure the project is built to the appropriate quality standards. We will seek and incorporate your input, too. Finally, we will ask the architect to approve the base specs to ensure they align with the Scope of Work as they see it.
By packaging written specifications with the plans being sent to builders for pricing for an accurate cost to build a home, you ensure that the pricing submitted is much more complete and consistent than it would be otherwise, allowing you (or NCHCC) to better assess it. The specifications can then be incorporated into the construction contract to ensure your home is built to meet them.
Written specifications provide everyone involved with clear, detailed information. Information is power. Empower yourself and your team to succeed by ordering NCHCC’s written specifications for your construction project!
Summary: Control Construction Costs with Written Specifications
There are many factors to consider when building a home, and custom home construction projects are the most complex of all. It is those complexities and the fact that plans for custom home builds are ever-changing that necessitate cost-plus fee contract structures. While these types of contracts allow for the fluidity inherent to custom home construction, they also open up an array of risks for owners paying the builders’ cost to build a home.
Although there is a general understanding by owners that cost-plus fee contracts are likely to change in cost and scope, there aremeasures that can (and should) be taken to increase the accuracy of each project’s cost estimate. This is where the value and benefits of written specifications can make a definitive difference in the time, cost, and quality of the project.
Learn more here.
