hawami

New house and builder kick backs from vendors

hawami
November 4, 2019
last modified: November 4, 2019

Hi, everyone:

i am in the process of building a house. Builder has provided list of vendors.

vendor gives builder price to builder. But he is not passing that onto me.

is it very wrong for me to ask him to pass that on to me?

thanks so much for your help!!!!

Comments (84)

  • bry911

    @ hawami

    Just to be clear, on a typical allowance account, your contractor is allowed to make a known profit from you on every upgrade. What he is not allowed to do, is make unknown profit. Typically contracts will have some verbiage that governs how allowance accounts are handled, and the most common verbiage is a cost plus arrangement. There are other arrangements available but they are somewhat rare in a full custom builds as they typically require more upfront work by the contractor and it rarely makes sense when you will build a variety of floor plans.

    There are legitimate reasons for a contractor making a profit on materials purchased. His risk/cost increases as material costs increase. For example, say your contractor walks in and there is serious damage to a newly installed floor, and no one admits to doing that damage (because they never do). The contractor is then on the hook for replacing that floor out of his pocket and the difference between a flooring selection that fit within your allowance versus one that was four times your allowance becomes very important suddenly.

    The answer to this is to mitigate some of that risk by charging a profit percentage onto every purchase that exceeds the allowance amount. He still bears the risk of replacing that damaged floor but not has some money to account for the difference.

    The sad reality is that this provides some incentive to intentionally lower the allowance accounts in order to lower the bid price on the job without risking actually making less money. As the materials go up so does the profit and so a low price and low profit bid becomes a typical price and typical profit build. While this may be less than ideal, it isn't deceptive because the amounts are known and just by doing a little bit of work on your end you can adjust those allowance accounts and their associated profit to correct for low allowances. Since you have all the information you need to arrive at a realistic result, rather than that information being hidden from you, then it is your responsibility to do so.

    Best of luck

  • PRO
    The Kitchen Abode Ltd.

    There are no laws that restrict a business from selling something at whatever price they wish. A Builder can charge whatever they wish for their services. The same as Apple can price their phones at whatever they wish. If you don't like the price of an I Phone you just go to another cheaper brand.


    "Kickbacks" as the term is implies are illegal, however there are many legal ways a vendor can provide rebates to it's clients. The most common is based on purchase volume plateaus, if their client purchases X number of units with a specified period of time then the vendor will rebate an additional discount to their client. This may be based on monthly, quarterly or year end purchases.


    I'm not aware of any law that requires a vendor to reveal any of the above to a potential purchaser.


    Depending upon the industry "Referral" fees paid by a vendor can be considered illegal if they are not revealed to the client. Lawyers must reveal this if they receive a referral fee from another agency they are referring you to.





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  • bry911

    I can't believe we are still having the discussion on whether or not builders have a right to their trade discounts.

    This is really simple. If you want to keep your trade discount while using an allowance account, then provide your customers a menu with prices before they sign the contract. Compose a list of every possible material that you will install on a house and the price you will charge them for installing that material. Be sure to keep up with model changes and stuff because remember if it isn't on the list you are not going to install it.

    If you do that, you can charge any price you want to charge. Seriously, list a particular tile company's products higher just because you hate dealing with that company. Get a great kickback (trade discount) from a certain vendor and raise the price of that item in your catalog because you want to make even more profit. If an item is popular raise the price if you want so that you make even more profit. In fact, do whatever you want because you are doing the work to prepare an itemized selection list to customers before they sign the contract.

    ____________

    However, if you rightly decide that building a catalog is too much trouble or expense, and decide to instead use a cost plus arrangement in the contract then YOU ARE LEGALLY REQUIRED TO USE ACTUAL COST!

    I don't care if it gets your undies in a bunch, I don't care how unfair you feel it is. In many states this isn't even a tort, this is statutory law. In every single state cost is defined as the actual amount of consideration surrendered and that is not open to debate. I don't have access to a citator right now, but if you give me your state I will try to look up a case in your state that cites Lagasse v. Allen.

    _____________

    In general, contractors in a cost plus arrangement have a heightened duty. Some courts have found they are fiduciaries, others have found that they only owe a heightened duty. I think this access to Construction Litigation Reporter is free, so just read that. It doesn't specifically define cost, but it does describe the relationship and that inherent in that relationship is that cost is actual cost and not whatever you want it to be.

  • bry911

    There are no laws that restrict a business from selling something at whatever price they wish. A Builder can charge whatever they wish for their services.

    First, this isn't true. There are laws that restrict a business from selling something at whatever price they wish.

    Next, please tell me that everyone can see the straw man that you are constructing. This is a straw man because the builder didn't make the windows, or the tile, etc. While he may have wide latitude for charges of his service, that latitude doesn't necessarily extend to the services of others.

    Finally, in a cost plus contract it is even a bit of stretch to say the builder can charge whatever he wants. How many court decisions, where the amount the builder charged was deemed unreasonable by the courts and reduced, would I need to post in order to get you to admit you are wrong? Please keep in mind I don't have access to a citator right now, and though I could probably get several thousand (ok many thousands) with a citator can we keep it down to single digits?

    "Kickbacks" as the term is implies are illegal, however there are many legal ways a vendor can provide rebates to it's clients.

    Again, a straw man. Yes there are many legal ways a vendor can provide rebates to its clients. However, that doesn't mean that every client can keep those rebates for themselves. In a cost plus contract, you can't. I know of no legal way to use the word "cost" in a contract while meaning something other than "cost".

    I'm not aware of any law that requires a vendor to reveal any of the above to a potential purchaser.

    Have you looked? Ignorantia juris non excusat just because you didn't realize their was a speed limit doesn't mean you get to drive at any speed you want.

  • Laura Mouse

    "I can buy a steak at Kroger’s for $12.37. Can I go to a steakhouse and buy the same steak for the same price?"


    Maybe if you offer to eat it raw off the styrofoam in the parking lot. Steakhouses normally add value to the steak before serving it.


    But using this analogy, what would you think if restaurants started listing prices on a menu that said: Filet Mignon: (Cost of Steak+20%) + Cooking/Serving/Potato Fee: $26 and then presented you a bill for $50 (cost of steak material = $20). If you knew you could get that same steak material for $12.37 at Krogers, wouldn't it feel like they are overcharging for their steak? What they would be doing is hiding some of the Cooking/Serving/Potato cost in the steak material cost. Restaurants actually hide all of their costs, but they do let you know the total cost they will charge before you buy so consumers can make an informed decision.


    The MSRP of Grohe Faucet 30295BE0 is $1051, but Home Depot sells that same faucet for $725 and Wayfair for $677. If a plumber says he charges Cost of Faucet+20% and $100 an hour to install, consumers might think the plumber will get the faucet for at least the price that they might pay themselves at Home Depot and are sometimes surprised to pay the MSRP which you would be hard pressed to find any store actually selling at.


    Nobody is saying "You can't make a profit". They are saying that the a la carte costing model makes it hard for consumers to budget when the definition of "costs" is not consistent or intuitively obvious, It's confusing. Contracts should clearly define whether costs are actual costs or MSRPs.


    Some builders/designers do pass on their actual cost of material but charge a price for their time/project that is higher because it actually reflects what their time is worth with profit built in. Some consumers prefer that because they know their builder/designer does not have a conflict of interest with respect to any given supplier and they know if they spot a faucet they like at Home Depot whether it is within budget or not (surely the suppliers can meet that price). I'll concede that other consumers prefer to hire the cheaper builder/designer and end up paying the same total project cost once they get hit with MSRP material costs.

  • tiggerlgh

    OP it sounds like you have a lot of upgrades. You can't compare a 300k tract home to a fully custom house for cost. All those upgrades you put in to make it custom costs more. It sounds more like OP is buying too much house for what they can afford so is trying to figure out a way to save on the agreed upon price, based on this comment " We are literally broke building this house.". Never buy too much house.

  • PRO
    Patricia Colwell Consulting

    Sorry but you chose the upgrades and now you are crying because you paid too much That sucks but welcome to the world where everything costs more than you wanted to spend 160K in upgrades on a 300K house shame on you for thinking this was smart.

  • shead

    I thought that in many states it is illegal for a contractor to upcharge an item or service and then charge an additional % GC fee on top of the upcharged item? We have a friend in that exact scenario with their GC right now and is taking him to court. He billed out labor costing him $X amount for $X+$Y (markup fee on labor) and then charged an additional GC% on top of the $X+$Y amount. Our friend is a CPA so once he got the specifics on what he was being charged and had paid, well, all hell broke loose :/

    Wouldn't this be similar to what the OP is describing?

  • shead

    @Patricia, nowhere did the OP say she was paying $160K in upgrades on a $300K house. Your response is out of line.

  • millworkman

    "But i would think you make a lot more. every upgrade is expensive. we did $160k in just upgrades so far."


  • shead

    The OP said, "I don’t mean to offend anyone. in my area, national builders are building house for $300ks. But i am paying 4 times more for mine and sqft is bigger yes but not 4 times bigger.Surely everyone follows same codes and material prices differ i suppose. But i would think you make a lot more. every upgrade is expensive. we did $160k in just upgrades so far."



    Taken two different ways: The OP spent $160K in upgrades on a $1.2M house (so 13.3%) or the OP spent $160K in upgrades on a $1.04M house (so 15.4%). Definitely not $160K in upgrades on a $300K house (53%).

    hawami thanked shead
  • lindacottonwood

    We just finished building a custom home on a fixed contract. Anything we wanted above our line item budget we paid for out of pocket. Anything on the Builder's line items that came in under budget was his to keep. When we found items for less we just moved the extra money into a different line.

    When we found a item we always checked with our Builder to see if he could get a better price. Sometimes he could and sometimes he couldn't. If he could get a better price that was less than we would pay, we didn't care what his price was. If he was able to make a few dollars great. We were able to save a few dollars. There again we had an open and trustful relationship.


  • millworkman

    Good point shead and I see what you meant.

  • atay284

    "Taken two different ways: The OP spent $160K in upgrades on a $1.2M house (so 13.3%) or the OP spent $160K in upgrades on a $1.04M house (so 15.4%). Definitely not $160K in upgrades on a $300K house (53%)."


    Either way, if you only wind up "upgrading" or going over your original budget no more 15.4% or less, I would say that's doing pretty good and falls within "typical". It sounds like maybe this was too much house to take on.


    Comparing small or even medium builders to production builders on a per s.f. price is useless, apples to oranges. No builders can match volume builders in pricing, in any market, as they can't recreate those economies of scale.


    Neither can house pricing be narrowed down to discounts, material price differences, or "everyone is following the same code". Unfortunately, it's more complex than this. What were the site conditions for the lot (production builder communities may have a lot of large site work obstacles taken care of by the developer), What style plan is being built? (production builders are very efficient at producing cost effective box style plans). Exterior finishes? "Better than code" level of quality, as rarely would those wanting a custom build settle for the "minimum".


    There is not enough information to know the details to make any reliable statement regarding pricing. I think one can assume houzz may not be the best place for your legal expertise as well.
    Lawyers and their advise do exist outside of houzz.....imagine that!

  • PRO
    The Kitchen Abode Ltd.

    bry911 - I appreciate your feedback on my last post but not certain I can agree with your counter claims.


    Would be interested if you could find any law or statute that restricts a sellers price unless they are a regulated industry or their pricing may be considered predatory.


    Vendor rebates such as those based on accumulated volume purchases are prevalent within most industries. Again I would be interested to see a reference to any law or statute the requires a vendor to pass these on to the purchaser.


    Revealing ones costs direct or indirect to purchasers, unless within the contract there are specific terms or conditions requiring one to do so, one does not have to disclose this.


    I'm fully aware that a court can under certain circumstances intervene and adjust what one is charged. This however is usually only done when the terms within the contract related to cost are ambiguous which has resulted in the client being charged an unexpected outrageous price for something. For example, I have a $500,000 build with a $30,000 window allowance. The builder shows me 5 different windows and I choose one. I then get the bill for the windows and it's $60,000. I complain to the builder and he/she states, those were the ones you chose and that's what they cost. In this situation a court would determine that the builder should have informed me in advance that the windows I chose were significantly more costly than the predetermined allowance. I as the client had a reasonable expectation that the shown windows were within the allowance and it was reasonable for the builder to have known/expected this. The court based on this would likely favor the client.

  • bry911

    Would be interested if you could find any law or statute that restricts a sellers price unless they are a regulated industry or their pricing may be considered predatory.

    I will grab these for you later on today or tomorrow. I actually pulled some decisions up at home and had them ready but didn't read this until I was in my office. I will get them tonight. To be fair, I am in the U.S. and so Canadian stuff is not my forte but I can try to find Canadian stuff if you want.

    In an effort to add some explanation before looking up cases, there are several contractual relationships, I will offer just a brief overview of a few to help people understand the difference.

    The one with the most freedom is arm's length. In an arm's length transaction you can charge whatever you want within reason, largely this means you can charge any upfront rate for your services and materials must only meet the implied warranties present in the Uniform Commercial Code, so goods must be of ordinary quality for their price range.

    The one with the least freedom is fiduciary. In a fiduciary transaction the client is owed a duty of trust, and in these relationships the provider is acting as an agent for the customer. Ostensibly that agent must put the needs of the client before their own.

    There are a wide range of relationships in the middle which have some heightened duty but don't go all the way up to fiduciary. These are often called standard of care or due care relationships. In these, the contracting party doesn't have to act as a fiduciary but has some heightened requirements of reasonableness. The standard of care model is often used in contracts with asymmetric information and some freedom. A homeowner contracting with a builder would never be able to properly oversee the construction of a home to ensure the product delivered was of reasonable quality for the price, and can't enforce that quality in the contract, there will always be some way for someone with a lot more knowledge to steer someone with a lot less knowledge against their best interest for profit. The standard of care model limits this, you can act for your own profit and even pretty good profit but you must meet the reasonableness test.


    Vendor rebates such as those based on accumulated volume purchases are prevalent within most industries. Again I would be interested to see a reference to any law or statute the requires a vendor to pass these on to the purchaser.

    I already provided one. Lagasse v. Allen sort of set the precedent for this and if I had access to Lexis I could use Citator to see how many times it has been cited (it has been cited quite a bit). It notes "On a cost-plus contract, the contractor is obligated to give supervision and to use his utmost endeavors to see that the owner gets value received."


    Revealing ones costs direct or indirect to purchasers, unless within the contract there are specific terms or conditions requiring one to do so, one does not have to disclose this.

    You do if you have a cost plus contract. Implicit in a cost plus contract is that the contractor will provide cost information to the customer and that cost information must be reasonable and verifiable. Does it even make sense that it wouldn't? Would your contractor then be able to say I paid $12,000 for that bathtub you wanted? Of course not. How exactly do you think a contractor is going to bill a cost plus contract without telling someone their profit?

  • PRO
    The Kitchen Abode Ltd.

    Bry911 - I believe we are actually in agreement, just seems as if we disagree based on our wording and examples.


    I'm fully aware of items such as "Duty of Care", "Misrepresentation" and the likes. I'm also aware that contracts, verbal or written, may be interpreted in varying ways depending upon how the contract is written and how the parties act in the process of carrying out their duties.


    I'm fully aware of items such as "Duty of Care", "Misrepresentation" and the likes. I'm also aware that contracts, verbal or written, may be interpreted in varying ways depending upon how the contract is written and how the parties act in the process of carrying out their duties.


    I believe that for many the problem as it relates to a true Cost - Plus contract is understanding what constitutes the Cost. The builders Cost is not necessarily just the cost of the materials alone, in many cases this is a supply/install situation, as such there will be a labor component on the Cost side, shipping and handling could also be another cost related item.


    In properly prepared contracts all of this is defined. Unfortunately there are builders that disregard this and clients that do not realize what's missing. Yes, the client upon discovery of this does have the courts available to them. However, the purpose of the contract is really to allow the two parties to understand their duties and obligations, agree to them and execute them in accordance with the agreed upon outcome. Doing so should negate the necessity of a courts intervention.

  • PRO
    Patricia Colwell Consulting


    I don’t mean to offend anyone. in my area, national builders are building house for $300ks. But i am paying 4 times more for mine and sqft is bigger yes but not 4 times bigger. Surely everyone follows same codes and material prices differ i suppose. But i would think you make a lot more. every upgrade is expensive. we did $160k in just upgrades so far. And he is making money thru his vendors also.

    IMo this is saying he over built for the area and now regrets the money they spent.

  • hawami

    Patricia. I wish you would not make up what other people are thinking. You have no right to interpret what others are thinking and blurting it out as if that is the truth. I wish Houzz makes an option to block certain people from posting. You have commented on everything so far that I have posted. And ALL of your comments are mean, offensive and I cant help but think you are just a hater lashing out in the online not so real world.


    I am sorry but I just have had it with your comments on all the numerous posts.


    i will delete this post so that you cannot say hater comments again.


    thank you everyone for your wisdom and insight.

  • PRO
    RES 3d Sketches

    Labor should not be a part of an Allowance but shipping handling would be. If labor cannot be included in the base bid, it would be stipulated as a unit price in the contract.

    Making parallels to normal consumer purchases is specious and unhelpful.

    Unless the OP posts what's in the contact here's no way to offer useful advice.

  • bry911

    The builders Cost is not necessarily just the cost of the materials alone, in many cases this is a supply/install situation, as such there will be a labor component on the Cost side, shipping and handling could also be another cost related item.

    Cost is the cumulative consideration surrendered to get an item in place. We could get into definitions of when labor is included for cost and all of that stuff but the basic principle still holds. Cost will never be more than the amount you actually paid after all discounts and rebates. There are times when a product might need some modification that isn't part of the installation process that would get added into product costs but those would be rare in home construction. For example, the amount paid to a third party to convert a foreign appliance for use in the U.S. Another example might be the costs of testing products that have stringent testing requirements prior to installation would be included in product costs, but I can't think of anything on a home construction site that would meet that. Those things happen but they are certainly the exception rather than the rule.

    In properly prepared contracts all of this is defined.

    I agree to some extent, but a contract will struggle to overcome things like a misunderstanding of the word cost. The builder likely has a definition in their head and that definition may or may not be accurate.

  • PRO
    The Kitchen Abode Ltd.

    I agree to some extent, but a contract will struggle to overcome things like a misunderstanding of the word cost. The builder likely has a definition in their head and that definition may or may not be accurate.


    Complete agreement here. That's why in a properly written contract these terms are defined so both parties understand what is implied by a specific term. This is also important in the event of a legal dispute, it's important that the court be able to determine what was the intent of the two parties. The first place they look is the written agreement. A properly written agreement also makes it much easier to determine if a party is in breach of contract.

  • robin0919

    'If the tile retails for $100, and the builder gets it for $75, then
    places his 25% markup on it, the $93.75 that you are charged is still
    less than you could buy it for.'


    You Obviously work for the builder!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  • PRO
    RES 3d Sketches

    The OP's original concern was not about vendor discounts or builder markups; the OP suspects vendors are paying the builder kickbacks which means the builder's cost is fraudulent by any definition.

    However, I suspect the OP doesn't have evidence of fraud but suspects it because the builder has not submitted the vendor's invoices.

    Until the OP sees the invoices or shows us the relevant part of the contract, there's not much to discuss.

  • hawami

    I just read my contract again and there is no mention of any cost related issues or mark ups or kick backs. I have an allowance and a base spec of which branch and which model will be included, whether it be cabinets, appliances, trims, windows etc. If i pick out something that is more expensive than that, I pay for the difference. Builder has designated vendors to work with. Some of them gives me a discount and some of them dont. But the builder received some $$ as % of what I purchased. Lets say I paid $95 on a retail price of $100, then builder will get 10% of $95 or something like that. In some cases, I pay retail price but builder gets a significantly lower price. For ex, I pay $100, and he “charges” $100 but actually the cost is $70.

    In all fairness, I am not a good customer because I ask his vendors to price match as they originally charged ridiculous almost fraud like charges. They were overcharging 30% above online prices. Where price match happens, builders margin of rebate gets reduced.

    I just wanted to know if that was a common practice.

    My question about the profit. It seems that subs and GCs charge a higher price for same material and same Construction method if the house is in a “prestigious” zip code. To me, that is unfair. But it happens. So essentially, I am over paying because the land is in this zip code. And even within same zip code, if the lot is “superior” to another lot, not only do I pay higher lot price but building cost per sqft is also higher. This happened to me while building this house. Builder is offering larger sqft house for cheaper price per sqft because the lot is inferior.

  • PRO
    Jeffrey R. Grenz, General Contractor

    It's not a common practice when the builder is building under a construction contract for property you already own. Is this your situation?

    If the builder owns the property most of what you are doing doesn't fall under construction law, but is treated as a real estate transaction. Is this how your home is being built?

    The type of transaction will determine the practice.



    Everyone can see most prices so it's strange to see kickbacks when you are contracting to build on land you own.

  • shead

    Per the contract, are you allowed to purchase your own items if you take responsibility in getting them to the jo, etc.?

    Is your contractor charging a GC fee (%) on top of any marked up price? I am

    not sure that’s ethical or legal. However, if he’s not, then I don’t see too much issue with how he’s doing it. And if you’re getting the product cheaper than you can buy yourself, I wouldn’t worry about if the GC makes a few bucks on it.

  • mackdolan

    Online retail sources frequently sell products below the wholesale costs of many local sellers. Including builders, designers, and mom and pop supply houses. They have no overhead, and make returns difficult. Insisting in price matching with that just ensures that markup happens in the labor portion, if you expect any kind of service to go along with your saved a few dimes on product. Markup on product is for services rendered for that product. Plus the installation costs on top of that. That 25% is earned money.

    You can’t ask someone to pay you to sell you something. Then add on top of losing money on the sale, you ask them to also be responsible for ordering, receiving, storage, quality control, and warranty. That isn’t how this works. That isn’t how any of this works. Otherwise, turn into your own retailer and buy it yourself, sell it to yourself, and you provide all of the service and warranty point.

    Except, when homeowners do that, they actually cost the trades time and money because they don’t take care of doing everything that the trades do automatically. So the labor price goes up again to deal with that extra time. Time is money. You either pay someone for their time, or you pay with your time, and still end up paying more money for the more time that your non-expertise costs you.

    You’re not being as smart as you think you are when you try to price match.

  • PRO
    Sabrina Alfin Interiors

    My question to the OP is, when was the last time you walked into a retail store and asked the owner what his cost was for the item you are buying? Do you ask the store owner to pass along his discount to you? Of course you don't. You either buy the item or you don't. Just because the contractor (or designer) doesn't have a physical location doesn't mean they are not a retailer.


    Read your contract with your contractor. I charge a mark-up for anything I specify because at the end of the day, it's ME who is responsible for getting the order right. If the order comes in broken or with pieces missing, I have to put in the work to make it right and to get it to the job site so there are no delays. As long as your contractor has a reseller's permit, he is allowed to mark-up the wholesale price. If you wish to avoid that cost, then you'll have to purchase everything on your own.

  • PRO
    The Kitchen Abode Ltd.

    hawami - it appears that you are talking about 2 different purchasing situations.


    1.) The builder purchases the material on your behalf.

    2.) You purchase the material directly yourself.


    In situation 1 - the builder will charge you their cost to purchase the material and land it on the jobsite plus their 10% mark-up. The price they pay for the actual material should be the actual price they paid for it, not some fictitious manufacturers suggested retail price.


    In situation # 2 - depending upon your contract, the builder may be entitled to a mark-up on materials directly purchased by you. In this case you can purchase the materials from whoever you wish, his recommended vendor, on-line or a garage sale. You find the material, you pay for it directly, you arrange for delivery and you assume responsibility for any returns. If the builder is entitled by the contract to his/her 10% markup then it's based upon what you paid for the item.


    If for some reason you believe that the builder has some kind of behind the scene discount, rebate or kickback with his vendors then I suggest you either purchase all of the materials yourself from vendors other than those recommended by the builder or given the mistrust you find a builder who you feel more trustworthy.


    Keep in mind that price matching is up to the particular vendor, some do, some don't. It's not realistic to expect the builder to shop all over the city or on-line to find you the best price. The builder will have a long term relationship with vendors, that relationship is not just based upon price. For the builder they need vendors who can provide a high level of support services such as sourcing a particular material, ordering it in, delivery the materials to the job site on time and handling any damaged goods or returns. You have to understand that this level of service is worth more than some on-line site.


    Concerning possible "Kickback" this term is typically used to describe a hidden payment by a vendor to the builder on purchases made directly by you. In most cases this is considered to be illegal. As such they will never be mentioned in the contract and it will be extremely difficult for you to find out if this is going on. Again, if you wish to avoid this then don't purchase your materials through any of the builders recommended vendors.

  • tiggerlgh

    OP of course location matters! First rule in real estate is location, location, location. So I am not surprised at all that a house on a better lot will be worth more than a house on a less desirable lot. You are comparing apples and oranges.

  • bry911

    As long as your contractor has a reseller's permit, he is allowed to mark-up the wholesale price. If you wish to avoid that cost, then you'll have to purchase everything on your own.


    NO! JUST NO!

    Seriously, if only there were some tool available that had access to a wide variety of information that you could use to check the accuracy of your beliefs before you went out and advised other people...


    The entire purpose for cost plus contracts is to remove the profit motive from material and subcontractor selection. So that the goals between the contractor and the client can be more easily aligned. NASA didn't want contractors saving money on parts for spacecraft... The U.S. military wanted to ensure that contractors were not tempted to save some money on inferior quality items. It shifts most of the price risk to the customer and essentially assures any competent contractor will be profitable on a job.

    So undisclosed discounts are exactly what cost plus contracts were meant to stop.


    Any portion of a contract where the price is not set in the contract must be based on some metric that was identified or identifiable at the outset of the contract. The two most common metrics are cost (which is far and away the most common on custom builds) and predetermined upgrade selections with prices available (which is the method used by production type builders).

    This will include allowance accounts. You could have an allowance account based on MSRP, you could write in a clause that excludes trade discounts or wholesale discounts, because both of those things were determinable at the beginning of the contract. However, lacking some verbiage in the contract that defines prices such that they could be determined at signing, you are not going to be able to enforce that to charge whatever you want. Aside from that, a contractor as a reseller is a bad idea, why would you willingly move to being governed by the Uniform Commercial Code when you can avoid it?


  • hawami

    So about location. So one lot is superior to another lot. You pay more for the land (premium) which makes sense to me. But why higher per sqft in construction cost? It’s same material, same construction method, same builder. This I believe is somewhat unfair.


    Seems like you are really at the mercy of the builder with new constructions.


    We had a builder tie in but decided to buy the land separately and pay all cash for that transaction. Our contract is very plain vanilla and does not contain much verbiage other than very simple terms.

  • PRO
    Sabrina Alfin Interiors

    Again, @bry911, when did you last walk into a retail plumbing showroom and ask them to pass along their wholesale price? Or asked Bloomingdale's to sell you clothing at wholesale? Or ask Pottery Barn to sell you furniture at wholesale? Never? Exactly right. Retailers, and those who have reseller's permits, have a right to make a profit. You don't have to like it, but that's the bottom line.

  • mackdolan

    Higher costs for building are always associated with custom vs a tract home. Higher costs are always associated with higher maintenance customers as well. A builder’s normal 25% markup can grow to 35% in some cases. I’ve known electricians to double their quotes after a project walkthrough with some homeowners. They don’t want to work with them. But if they do get the job, it will have to be worth it to them. That’s the luxury that an independent contractor has. You don’t have to accept their price. But if you do, then don’t keep trying to reverse engineer their compensation after the fact. It won’t go well. You need their services. They don’t need your job. They have the power.

  • PRO
  • PRO
    The Kitchen Abode Ltd.

    bry911 - I don't think there is any real dispute concerning the rules that govern a pure Cost-Plus contract. However, a contract could contain other contractual elements that are not Cost-Plus. There may be a fixed price section and then a cost-plus section and then possibly a separate material sale element. Certainly the first two are very common, the base construction is at a fixed price and only the finishing materials are cost-plus, both of which are covered within the same agreement.

  • tiggerlgh

    How do you know exactly what other’s paid for their homes or that it was the same exact materials bought at or about the same time? Material costs have been going up. Too many factors to assume

  • PRO
    RES 3d Sketches

    It appears there is no limit to the different ways people can interpret a construction contract.

    Bry has it right but many of you have misunderstood construction contract and accounting procedures.

    You need to understand that comparisons to consumer purchases are not relevant. In a construction contract the contractor provides all material and labor unless it is clearly identified in the construction documents as 1) an "Allowance" where the owner chooses the materials and the contractor buys them) or as 2) "suppllied by owner and installed by contractor" where the owner buys the materials, or as 3) "work by others" where the contractor is not involved beyond coordination of the work.

    In this contract the OP has made it clear that there is no work labeled as categories 2 or 3 so when the OP selects an Allowance material from the approved vendor, the vendor will give the price to the contractor and the contractor will add his markup and give it to the owner for approval. The owner will never know the vendor's cost or profit but the contractor should show the owner the invoice from the vendor and also show the amount of the previously agreed upon markup % that he has added.

    What I think has happened here is the OP and many of the other members have assumed that the Allowance materials fall under category 2 even though that is not what the contract says.

    If that had been the intention of the contractor, he would have increased his fixed price to keep his profit the same and allowed you to buy from any vendor.

    That doesn't mean there isn't a kickback but I don't know how you would ever discover proof of it.

  • PRO
    The Kitchen Abode Ltd.

    It appears there is no limit to the different ways people can interpret a construction contract.


    First, no one hear knows the exact wording of the OP's contract. We can only theorize what clauses it may contain based on what is typically in this type of contract.


    Second - Though the contract may be related to the construction of a home, as with any contract the two parties can include anything they wish provided it is legal.

  • millworkman

    "i am in the process of building a house."


    At the end of the day, you have a contract you agreed to. At this point it is what it is. Glad I am not this contractor for christs sakes. If you had questions about this you missed the boat...........................

  • hawami

    Seems like most of the respondents are builders or GCs or interior designers, and not home owners. As someone on the opposite side of you guys, I think it would have been better if these cost terms were explained and written out more clearly. But as is in many countries, construction world seems not so transparent. I found out that the builder is getting rebates only through the vendors who easedropped that on me. I wish I had heard it from my builder.

  • millworkman

    I still am confused? Rebates, discount, kickbacks, what exactly do you mean? If rebates, what do you mean, how does he get these, and eves-dropping doesn't make it so.? You have been all over the map..............................

  • atay284

    Eves-dropping Is the avenue for discovery of illegal kickbacks? Sounds like the evidence is mounting, a houzz lawyer would probably take the case.

  • tiggerlgh

    I am a homeowner not in the industry but am very confused by what OP is saying. Or trying to get at. Maybe one clear post would help but so far it seems all over the board.

  • hazelcraddock

    eavesdropper - a person who does not listen face to face but from under the areas of a building that meet of overhang the walls - the eaves.

  • jmm1837

    OP - to be fair to the pros here, your explanations of your contract, and of your builder's behavior, are very unclear, at least to this non-pro homeowner.


    I have great difficulty myself following statements such as: "the builder received some $$ as % of what I purchased. Lets say I paid $95 on a retail price of $100, then builder will get 10% of $95 or something like that. In some cases, I pay retail price but builder gets a significantly lower price. For ex, I pay $100, and he “charges” $100 but actually the cost is $70. "


    Are you saying, first, that you are personally paying the vendor directly for these items, and that the vendor is then paying the builder 10% of the value of your purchase? That would be a kickback, but is that what's really happening? Or are you saying that the builder is buying the items and charging you more than the invoice price for them? Has the builder actually provided you with the invoices from the vendor? If not, and assuming you have a cost-plus contract, I'd certainly insist on seeing the invoices.


    Presumably, if the builder is adding a mark up, it's covered under the terms of your contract. Obviously, the builder's time has value, and if he has to order, collect and store the goods, it would seem reasonable to me that he would charge you more than the base invoice price for the service he's rendering. But the contract is king, so what does it actually say?



  • PRO
    Jeffrey R. Grenz, General Contractor

    @hawami - it matters whether you own the land vs the builder owns the land.

  • chispa

    Jeffrey,

    A few posts up the OP said:

    " We had a builder tie in but decided to buy the land separately and pay all cash for that transaction. Our contract is very plain vanilla and does not contain much verbiage other than very simple terms."

    It would seem that OP owns the land.

  • mackdolan

    Every posts adds more layers of expense and miscommunication to this project.

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