If the budget works, and the finished house cost makes sense relative to other homes in the area - that's the test. (and the builder has a good reputation, you've done your homework, talked to clients who built recently, etc)

Consider, though, that "fixed" may not be fixed. Check for additional costs for fountation issues (removing dirt, bringing in dirt, rocks, water, etc.

And ask what exact items can be had for the allowances - see the cabinets, the fixtures, etc. Allowances are almost always painfully low, leading to shockingly high cost overruns.

Thanks. The price per square foot is in line with the community (except the tract homes nearby, which are of course, lower). The main difference that feels off on our place is that we chose simple finishes like a plain concrete floor while the others have wood and tile and some more luxury finishes in the same price range.

I also feel ok on allowances so far. I was able to work with the builder’s plumbing fixture vendor on the whole house and it came in $2k under the allowance numbers. I also got some early quotes on things like interior doors (through the builder) and was able to stay under there too. Our interior designer said she thought they were ok as well. Plus of the reference checks said the builder came in on budget! So that’s all heading in the right direction.

Maybe I just have an expensive design. It’s the first time we’ve built from scratch so we are new to this. I always thought that interiors drove up the cost but in our case it’s the foundational pieces.

And dirt removal is an allowance with an up charge if they find rocks, etc.

Do you own the land?

Thank you. If I did cost plus I obviously take on the risk. Any guess as to how much buffer is in the fixed price?

Chispa - we do own the land.

The fixed portion is not your business. It just isn’t. Let it go. If you want to make it your business, you switch to cost plus. You can not have your cake and eat it too. That is not how building contracts work. You do not have full transparency without full risk.

It is fair if you can afford it, you love it, and that is it. End of story. Not everything is full dollars and cents ”return on investment”. You are paying for a luxury that gives you what you want. No different than buying a Porsche or Lotus to drive rather than a Hyundai. Both cover the A-B necessities. One has a bigger car note and the driver has a bigger smile.

If you have cold feet over spending that amount of money, you wouldn’t be alone. Do a gut check. What is the real issue here?

You have to give up control to get what you want. You cannot do it without making that leap of trust in your builder and hiring him. Spit or get off the pot and cancel the whole project. You are not getting ”better” than the builder you describe.

Thanks all. My dad was an accountant and I drive a Nissan so those analogies made me chuckle. I’ll do some more thinking on if the risk of cost plus could work in my favor here. I appreciate the perspective.

If the builder is willing to do a fixed cost for the foundational pieces, I would be confident in saying you are paying more than a 15% markup there for him to take on the risk.   

If you like transparency,  I would go with cost plus.  However, expect that some things will go up.  Between the time we got bids and 6 months later,  a number of vendors had price increases.  We had plumbing and stucco go up by 10-15%.  However,  the cost of framing materials went down by 15% due to lumber price fluctuations,  so in the end, our costs for the foundational elements ended up being slightly lower than the initial bid due to frame materials being such a large portion of the construction cost.  However, we may have lucked out only because lumber costs were so high when we initially bid the build.  

I like cost plus as long as your builder will try to save you money and rebid major items if the market changes.

" The price per square foot is in line with the community "

Square foot is not a metric that is truly worth much at the end of the day.

" I also feel ok on allowances so far. "

You want to eliminate surprises, get rid of as many of the allowances as humanly possible. Specify and detail everything. Allowances are asking for trouble. Always.

I don't understand how you have a fixed-price contract with a 15% management fee. If the price is fixed, it would seem the management fee would be, too.

As far as analogies go - do you know how much your Nissan cost to manufacture?

Do cost plus - in a rational market, risk is rewarded. Don't be surprised if your builder doesn't want to do cost plus.

And just FYI - sometimes "simpler" finishes are harder to execute - often leading to higher costs. Additionally, ubiquitous finishes tend to drive costs down.

If you do switch to cost plus, I would also encourage you to negotiate the markup rate.  Builders are often a bit flexible when it comes to the rate.  For instance,  building a 1.5M home versus a 1.2M home may cost the builder the same amount of labor and time (the differences may be primarily driven by finishes).  A builder may be happy making the same total profit on either home,  but the markup percentage would be different.  Also, as others said,  work out as much detail as you can for the allowances.  For instance,  if you know you will want a certain type of flooring,  ensure they budget for that via their vendors.  It won't be exact,  but it will be better than the allowances accounting for 12x12 tile when you really want 24x48, for instance.

This is typical of a fixed price contract, especially when homeowner has a construction lender involved, lender wants the builder to guarantee completion at a certain price.

Thank you all. Charles Ross Homes - the builder fee is fixed. I just calculated the approximate percent of total for the markup when I posted. Sorry for the confusion.

Jeffrey Grenz - that also makes a ton of sense. We are financing. That might be what seals our fate on this one. I may not be able to get cost plus even if I wanted to switch but I’ll talk with the lender. Good insight!

If the builder's fee is fixed and the other elements of the contract are fixed price, (other than allowances) the typical practice in our area is to provide the homeowner with copies of invoices for the allowance items only. An exception to that practice would be if a price escalation clause in the contract. That's a whole different animal.

"Is the building envelope itself a 2nd profit center?" Yes, of course it is. Builders have relationships with various vendors and subs.

If your builder has a good reputation in the area (as he seems to) then he probably has first pick of subs and products and gets discounts, perhaps deeper discounts than other builders. Even going on the sites where you can buy your own finishes, he will get deep discounts that you cannot see, nor can you get. He will then pay taxes on those discounts (considered a profit). For instance, he may say you can only order tile from XYZ. You will never know he pays $2 sf, when the public pays $12 sf, which is why some builders force only certain vendors on clients. If the fact that the building industry earns part of their living by structuring their builds this way bothers you, if it makes you feel exploited, then you should go for a builder with full transparency.

However, first, realize that almost every build on the new home build threads here have gone substantially over predictions, even cost plus contracts. It's rare to come in at budget. So if this guy tends to come in on budget, great! And second, ask yourself, if your builder is reputable, and this lack of transparency is industry standard...why would you choose a builder who may need to offer cost plus? (And believe me, even with that supposed transparency, you probably are not seeing the whole truth and nothing but the truth.) I mean if they can make more money the other way, why ever offer that? See my point?

Possibly having first pick of subs and good relationships with subs works in your favor...it means he is more likely to get the job done on time, which can be a cost saving issue for you in terms of inflation and bank fees. Any house that goes over what the bank requires in terms of time can cause the bank to begin charging various interest rates and penalties. Good luck, and check out the build threads here.

Thank you Keen. This builder has told us we can order allowances from anywhere (they’d store it for us), but also offered up places they have used before as options, which is great. They also told us that they’d lock in on wood costs, etc with a signed contract. Wood, stucco and concrete are the biggest line items so that will minimize a lot of the risk with cost plus.

The builder owns a subsidiary construction business, so that adds an additional layer here. They are selling to themselves. I was hoping that if we got multiple vendor bids for key budget areas that would help ensure fair pricing. I do like transparency (clearly) and I get the builder needs to make a profit. Just trying to manage my spend since new construction loans are coming in north of 8.25%.

I have learned a lot in the last 14 hours and will keep reading the threads. Thanks again!!

I didn't read the entire thread but a 15% management fee is indicitive of a Cost of the Work Plus a Fee contract and a fixed price is indicative of a Lump Sum Contract. Which is it?

Res2architecht - the current contract is fixed price including the builders fee which is approximately 15% of the total build. I did a rough calculation to show their incentive level but didn’t mean to confuse the two types of contract by doing so.

Our lender has agreed to us doing cost plus so before we go back to the builder we are asking our architect to review designs to help us understand if there’s anything particularly unique/pricey in his designs that’s front loading so much of the cost on building envelope (currently 2/3 of the overall contract).

The math is pretty consistent with our experience-at least pre-pandemic. The majority of costs to build a home are "baked in" during preliminary design; driven by the site-specific costs (clearing, grading, foundation, driveway, utilities, etc.) the size and architectural style of the home, the complexity of the footprint, the materials of construction, and the various systems such as HVAC, plumbing and electrical selected for the home. After preliminary design, homeowners control around 20% of total construction costs (finishes, appliances, trim, etc.) Add your 15% builder's fee and your at 100% +/- Unless you have an unlimited budget, you'll be well served to have your builder involved beginning at the very start of the design process.

That’s helpful. Thank you Charles Ross Homes!

Another option to potentially discuss is whether your builder might do cost-plus but with a 'fixed' plus in terms of $$$ amount vs percentage.

From one perspective, the builder getting a bigger fee because lumber or drywall costs go up isn't exactly "fair" (maybe not the best/right word there). The amount of work they do, or cost, doesn't change on their end. The raw materials costs just go up.

With all the COVID price increases, I think this would be a fair approach -- estimate the cost of the build today based on selections, apply the builder's margin/"plus", and fix that amount in the contract. Any change orders would change that #, but basic price increases of the specified materials wouldn't increase the fee you need to pay.

No clue if they'd go for it, but if you're having the discussion, value transparency, but also want to fairly share the risk, I think it's a reasonable approach (but obviously I'm not a builder/GC)

Thanks. We spoke with our lender who said they prefer fixed cost contracts but they’d consider making an exception. We then asked our builder if they’d do cost plus and they said - yes - but the “plus” would be 20%. Clearly they don’t really want cost plus LOL. So - after all that hand wringing we’re staying fixed price - but this was still a good thought exercise and I appreciate all the perspectives shared here. We learned a lot reading them. Thanks all!

Back to your headline: if you want to understand "fair" get another bid using the same allowances. There are multiple custom builders with strong track records in SF.