Page 14 - Secrets of a Luxury Home Builder
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Builders Contracts & Insurance

There are many different ways to enter a legally binding agreement with your custom
homebuilder. As we have already discussed the use of a design build contract, which has
many benefits for owner and the builder, foremost mentioned a good opportunity to work
with one another before entering into the construction agreement. When it is time to enter
into a contract with your builder you should explore the best contract for your needs as the
owner. We will review the many options available to engage the building process.

The most commonly known contract is the Fixed Price Contract. This is just what it sounds
like, consisting of a detailed scope of work for a fixed price. This contract usually references
the design plans and supporting documents. If there are any deviations from the plans
requested by the owner, a change order will be created for an additional expense. The
benefits for the owner is that they are usually more comfortable with a fixed construction
price and their lender understands the total will not exceed this amount. The drawbacks of
the fixed sum contract for the owner is that the general contractor builds in contingencies
for such operating risk as material price increases and estimating errors.

The second most popular option is the Cost Plus Contract, which is a flat rate fee as a
percentage of the total cost of the project. The general contractors role is still responsible
for maintaining the construction cost through competitive bidding and document control of
the project. This contract is often used on large complicated projects where a fixed contract
amount is not reasonably attainable due to such things as design unknowns or irregular
scheduling/timing or possible logistics issues due to the location.

The benefits for the owner is that full disclosure is required under this agreement. The
owner reviews all project invoices and expenditures through monthly payment
applications. Since the builder is paying the bills, they have more direct control over the
project cost and provides the owner with more flexibility over the project scheduling and
changes that occur on site. In special situations this agreement can actual cost less than
other contract agreements.

The disadvantages to an owner is the lack of order and control because of the volatility and
changing conditions of the projects plans. Without the appropriate contract stipulations,
the builder is not incentivized to keep cost down but rather to spend freely because he is
paid on the total project cost.

The Cost Plus % Fee, a Not to Exceed Contract provides the owner the benefits of a fixed
price contract through the benefits availed by the not to exceed feature, while benefiting
from a negotiated builder fee. The disadvantages to the owner is if the fee does not have an
overhead allocation this can create issues between the owner and builder when the owner

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