The Ultimate Guide to Home Builder Cost Models

Let's take a closer look at the three most common cost models used in the home building world so that you are sitting in the driver's seat during your home build.

There are three common ways for builders to model the cost of building a home. They are; Fixed Price, Cost Plus & Fixed Fee. All three models have advantages and disadvantages. All three have their place in the home building world. At Drengr Solutions we have and will continue to use all three models to match the needs of the client and the project.

Before we take a closer look at each pricing structure it is important to mention that the most important decision for you (the client) is choosing a builder that you trust. As a client you must trust that the builder is looking out for your best interests because ultimately the builder will be spending your money for the next 6-12 months. There are so many reputable builders out there. Take time to find the right builder for you.

---

Fixed Price / Price Per Foot

This is the most common way for home builders to calculate the cost of the project with their fees included. Each home is lumped into categories based off complexity of plans and types of finishes going into the home. The price typically changes very little during construction as large margins afford room for cost increases without having to bring those increases to the client. The simplicity for all parties is the advantage to this pricing structure.

Pros:

This method is simple for the builder and simple for the client.

Cons:

The simplicity that the Price Per Foot model brings also has its drawbacks. Lack of transparency being the key issue. For example: When a client wants to upgrade the kitchen countertops they ask the builder what will it cost. The answer is typically “the project will go from $220/Foot to $235/Foot.” The client is not given the actual costs because there is always a veil hiding the costs in this model. Another point of concern is that the builder is incentivized to build as cheaply as possible and drive down the costs so that his profits are higher at the end. As long as the builder passes code and fulfills the minimum requirements of the contract they are living up the their end of the deal. Sometimes you may not get the best practices or the little upgrades that the builder might do if it were their own home.

Cost Plus

The second most common pricing structure for home builders. In this model, the builder projects the cost and adds a percentage on top of these numbers for their builders fees. As receipts come in the builder compiles them every month (typically) and gives them to the client with an invoice for all costs plus their markup.

Pros:

This creates transparency because every receipt and cost is accounted for. Upgrades are often recommended by the builder and clients are more active in the process. The cost of upgrades is clearly defined for the client.

Cons:

The builder is not incentivized to cut cost or use the cheapest bids as doing so actually decreased their profits. Little things like returning extra material or finding a cheaper substitute material can be overlooked when it also takes money from the builder. In the end, the more expensive the build the more money the builder makes.

Fixed Fee

In this model the client and builder agree on a fee for the builder services to be rendered. The builder oversees construction and compiles receipts for the client that are typically billed monthly. At key milestones or timelines the builder adds a percentage of their predetermined fee into the bill.

Pros:

The builder is not incentivized to build cheaply or to drive up the cost of construction. There is complete transparency for the client.

Cons:

The builder is incentivized to get to the next milestone as quickly as possible. This can lead to time being valued over quality or less options being given to the client. This can also lead to choosing the contractors that can start immediately instead of waiting for the best contractors.

Conclusion

Each cost model has pros and cons. In the end, finding a home builder that you trust should be your single biggest concern, not the cost model. However, knowing the price structure is important because it generates questions for you to discuss with your builder. Take time to discuss what happens if I upgrade this? or change that? Discuss what types of decisions that you want to make and where you trust the builder’s judgement. The more that you get on the same page with expectations the more enjoyable the process will be for you and your home builder.