Why should someone else take on the risk to build your house? Building is a luxury that not many get a chance to do and/or have the budget to do it. We are doing cost plus and between covid supply/labor issues and wanting better finishes in many areas than what our builder budgeted in the original bid, we will be way over budget. Even before covid hit, I had warned my DH that the initial budget was not enough, so we also planned based on a worst case budget, and we'll certainly be at that level. Sure, it was way more than we wanted to spend, but still fell within our personal financial plans.

Maybe this is not a good time for you to build if you won't be able to handle the further potential risk and price increases.

The only positive is that covid also increased the sales price of existing homes in our neighborhood by substantial amounts, so we aren't the only people who overpaid in this market! Misery love company! 😄

There is a type of contract known as "cost plus with guaranteed maximum price". This would involve setting a price ceiling higher than your original price estimate. If the project goes over the guaranteed maximum, the contractor absorbs the cost. If the project ends up below the maximum, then the "savings" are split perhaps 50-50 (or as negotiated) between the owner and the builder. This incentivizes the builder to keep costs down. However, you are in a sense buying "insurance" against prices rising. If the project comes in on budget, then you would've actually paid more. If on the other hand it goes over, then you save. This would also depend on the contractor's risk appetite. Also, as I I've read many times on this board, you don't want your contractor to be losing money on your project. This would have a detrimental effect on the construction time frame and quality.

Best advice? Vet your contract with a CONSTRUCTION LAWYER. Not a real estate lawyer.

Are there other banks locally which might be wiling to loan on cost plus basis? If this builder is the right person, his performance won't be changed by the fee structure. If he is the wrong guy for the job, the contract details won't protect you.

Given the continued volatility in material and freight prices, it will be common to build on a cost-plus basis or have a contract full of allowance items to include big ticket items such as lumber, windows and doors, HVAC equipment, steel, concrete, etc.

One bank in our area is lending money to a client of mine based on the appraised value of the home based on plans and specifications. The client will need to fund any excess from personal funds, but may be able to renegotiate the mortgage amount at completion based on an actual appraisal of the completed home.

I recommend that the builder you select develop an accurate material quantity take off and get proposals on every component and from every trade prior to contract--no "guessing." That will help minimize--albeit not prevent--upside risk.