The system I am familiar with has an agreed total price, specific stages/check-points in the build, and the expected draw amounts for each stage. If any part of the build cost exceeds the original pricing it must be documented and approved as a change order.

For example, the bank allows the builder to draw $x,xxx up front for the site prep and pouring of foundation. Once its inspected and that portion of the construction is approved by the city (and usually verified by the bank), the builder draws $x,xxx for the next stage of construction (framing, roofing, etc.). It goes through that process throughout the build. Change orders are handled separately, and are paid directly by the owner. One driver for this cost/production management structure is because of your projected final bank loan, since the bank usually needs to approve your final loan value before construction starts. They don't want to let you spend $500k on the house and find out its value for the final loan is only $400k.

Payments to subcontractors are usually handled by the builder. However, I would want copies of the invoices and payments to subcontractors to ensure they were paid and there would not be a mechanics lien after the fact.

If you start paying sub-contractors yourself you are way too much in the middle of the management process. I doubt any builder would like that solution. Its similar to someone who wants a complete breakdown of a plumbing repair so that they see parts costs, labor cost, travel time. overhead, etc. You just want to know its done to your satisfaction and at the agreed total price.

Bruce

When we built on a cost plus contract we were provided copies of all invoices with every draw request. I’m currently doing a basement finish also cost plus and again, I see all invoices with each draw. Builder paid the subs.

Most builders are "option 1" only, in fact many larger const to perm lenders vet builders and their ability (capital, skill & experience) to manage the funds, construction & client before approving the loan.

I know a builder who will work with option 2. He is a licensed contractor working as a consultant. Understand that option 2 puts you in charge of the project.

I’m not in the US so have no idea if what we did is even possible but it seems like a mix of both.

We bought a lot and got a regular mortgage on the existing house. When we decided to build we applied for a construction mortgage. At that point we needed to provide the cost to build and the budget from builder. They then confirmed this would be acceptable and issued a construction mortgage to us.

We were given draws of money to use to pay. The builder managed the build and provided us with invoices every second week and we wrote one check to his company.

At certain intervals someone came and checked the work to make sure that the volume of work competed matched the volume of money given. We had to provide our detailed spec book with all our planned purchases etc.

Upon completion of the home it was appraised again and the mortgage was converted from a construction mortgage to a traditional one.

The bank never met the builder nor got a single invoice etc from them. They only saw the build budget, spec book, and their appraiser viewed the progress in person a total of three times.

The builder never confirmed or saw anything from us to prove we had the money to pay. They just expected us to pay upon getting a bill every second week, which we did.

Thanks all for the comments and feedback! I guess option 1 is more realistic and better for all involved as long as I see invoices? I’m paranoid to let so much money be managed without oversight. Even at a small level, what if the builder says that building materials cost 50k when in reality it was 45k. It may not be far off the money mark for a bank to notice but that is a lot of money to me to “lose”. Perhaps I just need to learn to let go and trust :)

Lump sum or fixed contracts have a cushion for the builder though to protect them from losses. It’s true they in theory ensure the amount is fixed, however, they often exclude certain things. For example we looked at a fixed price contract that excluded excavation as a fixed amount. I understand why but that’s a huge item.

We were very happy with cost plus as it let us control what we could. Lumber was lumber but we were able to actively choose to spend less on lighting in a few rooms to then spend more on others. It is very easy to say yes I’ll spend more but it’s also easy to say no. We were presented a tile for our laundry room that was a basic subway tile. Then we were presented with one triple the price for our kids bathroom. Why? We happily chose the laundry one for two kid baths and the suite bathroom. But we had self control and a budget we planned to stick to. I fully see how easy it is to get off that budget.

Both types of contracts are more than acceptable. It’s entirely up to what the homeowner can tolerate, how much control they think they will need to have and how much self control they have.

Just my 2 cents...

In reality the transparency you have is "governed" by the contract, if the contract gives you transparency, then you should have it regardless of who writes the checks and if it doesn't allow it, then writing checks is not going to get you that transparency. In either case your contractor can simply demand a payment per the contract terms and either you or the bank will have to write it.

The reality is often even less comforting. Transparency may be governed by the contract, but really it is ruled by the contractor. You can find many examples of contractors who apparently forgot to read their own contract. At that point you have to decide which battles to fight.

Your best bet for a good result is picking the right contractor up front. Good payment schemes and contract terms don't build good houses, good contractors do. Do your due diligence, find a contractor you are comfortable with, pay a little extra cash for a little extra integrity and don't worry so much about whether it is a fixed cost or cost plus contract.

IMO neither contract version is significantly better. Both have advantages and disadvantages and the best option for you will depend on individual specifics. However, we should note that cost plus contracts exist to shift risk from the builder to the consumer in order to improve quality. In other words to make it so cutting corners is not profitable, but have their own problems also.

thank you again for the comments! i forgot to mention that we will be doing a cost+ arrangement with the builder, hence wanting to make sure I have eyes on every invoice. I think as long as that is there, I will be OK with the builder handling the money himself.

My banker has explained that the process is very complex to me:

1. The builder requests money and provides invoices to bank.

2. Banker asks for my approval of invoices.

3. Inspector goes to build site and confirms the work has been completed.

4. Lawyer does a tract search to ensure that no liens have been placed on the property by any subcontractors.

5. Bank cuts check to builder.

6. Builder must sign lien waiver prior to next check being issued.

If your bank does something similar, then option 1 seems to be fairly safe.

There are, generally, three types of construction contracts:

--Lump sum;

--Cost plus;

--Time and materials

An owners access to costs for individual trades, including partial payments, varies with each type of construction contract, as well as any particular terms stated in the actual construction contract.

Good comments above ^^^.

Comments about receiving lien waivers with each progress payment is important.

My bank requires me to approve the draw, including all the invoices, before they disperse the funds to my builder. It ends up being easy anyway, because I act as a go-between and my builder gives me the invoices and draw sheet, which I scan and email to my banker.