When meeting with prospective clients, one of the first questions I get is “What’s your fee?”. There are three common ways in which Custom Home Builders calculate their fee. In this blog, I’ll give you the description, pro’s and cons of each method.
1. Cost plus a percentage:
In this approach, the client pays the cost of construction plus a percentage markup by the builder.
Pros:
-Allows a project to get started quicker.
Cons:
-Builder has no incentive to control the cost. The higher the cost, the higher their builders fee is.
-No incentive to build the home on an efficient timeline.
-Client has to account for additional builders fee cost with any upgrade they decide to move forward with. The builder will add a percentage to every dollar spent.
-It is crucial for the client to understand what is considered a cost of construction when using this method. Some builders will include employee wages, insurance, etc.. as a cost, which results in a higher builders fee.
2. Turnkey:
Builders using this approach will give a complete price for a strictly defined scope of work.
Pros:
-Client knows the cost of the home upfront.
-Helps clients stick to a tight budget.
Cons:
-Contingency fees are added to the budget in case of unexpected costs. This creates the potential for a higher builders fee relative to the scope of work. If the contingency funds aren’t used, the builder gets to pocket that extra cash.
-Not Custom. Since the budget is turnkey, there is little ability to make changes or customize your home.
-Incentivizes the builder to use cheaper products. The less expensive the home is to build, the more money that goes in the builders pocket.
3. Flat Fee:
Builders using this approach will establish a flat builders fee generally based on the square footage and scope of work. The fee is established at the beginning of the project and will not change unless the square footage of the home or the scope of work changes. The client pays the exact cost of construction plus the flat fee.
Pros:
-Allows the client to customize the home however they want without having the figure out how much extra the builder is going to charge them.
-Full transparency.
-No hidden cost. The client see’s every invoice for the home and approves it before it’s paid.
-Incentivizes builder to build the home on an efficient timeline.
Cons:
-Client pays any additional cost incurred. For example, if you want to buy a more expensive range, you just pay for the range, not the range plus an additional markup from the builder.
-The exact cost of the project is unknown at the beginning though it can be estimated within 10% generally.
I hope this article was informative for you. The different approaches in establishing a builders fee have their place and each builder has their preference. MCH prefers the flat fee method. This approach keeps the ball in our client’s court, whether they want to be budget friendly or have gold toilets in every bathroom. It allows the communication regarding the budget to be fully transparent. It also empowers our clients to upgrade anything they want without the worry of racking up additional costs in builders fees.
If you or anyone that you know are interested in building a home we would love to help! Please reach out to hayden@mchtexas.com, 682.208.1576, to get started on your dream home!
