Selecting a builder in the current market
- November 15, 2010
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So you are ready to build your custom home and you are pretty excited about the fact that there are a lot of hungry builders willing to fight for your business. This can be a great opportunity to build your home at a lower price while the market is down. Builders understand the market and realize that they need to adjust to it. However, there can be unintended consequences when you are not careful in your approach to selecting a builder.
Let me share a story with you that I heard the other day about someone who sent out their plans to seven builders to have them bid. Now, you are probably thinking that in the current market, this would be a great strategy for getting your house built at the lowest possible price. After all, it works when you get several dealers competing for your business when you buy a car. Here is the rest of the story.
The seven builders turned in their bids and the potential clients narrowed down their choices based on price. They settled on the lowest bidder and were excited to move on with the project. Unfortunately, a few weeks after moving forward with the builder they selected, the builder came back to the client and told them it would actually cost $150,000 more to build the house than the builder had originally estimated. Whether the builder intentionally underbid or was just not experienced enough to properly bid the house did not really matter at that point. The potential clients could not afford to build the house at the new price.
This was a bad situation for everyone involved. The potential client was at a standstill with a design to a house that they could not afford to build. The builders who accurately bid the project lost the deal and all of the time they spent bidding the house.
However, there are ways to avoid this scenario and have a fun and successful building experience.
There were two problems in the previous story. The first problem is that the house that was designed did not fit their budget. The second problem is that a custom home is an extremely complex thing- not a commodity. There are hundreds if not thousands of specifications. It is extremely difficult to get a true apples to apples comparison when bidding a custom home. Each builder may make different assumptions about the details that are missing from the plans. When there are several bidders, there is a lot of pressure on the builder to come in with a low estimate. In the worst case, unethical builders underbid the project and figure that they will break the news to the client later after they have won the business. They are willing to risk their long term reputation in order to win the job today. Even in the case of an ethical builder, there is a lot of pressure to bid the best case scenario. They assume a build in which everything goes perfectly and there are no unexpected costs. If the engineering has not been completed, the builder assumes that it will require the simplest and least expensive foundation and structural design. While it is more appropriate to bid in a more conservative manor so that it is extremely likely for the house to come in on budget, it is likely that the builders taking this approach will not win the business.
There are really two ways to go about the process of choosing a builder the right way to avoid this problem. They can both be effective and it really depends on the goals of the client as to which option is the best for them.
In the first option, the clients choose an experienced architect who will produce an extremely detailed set of plans and specifications. This should also include full and complete engineering. All of this involves a large investment in time and money. Every single detail must be carefully thought out and documented for the builder to follow. This is much more difficult to accomplish than one might think. Any minor detail left out has the potential to be “underbid”. The vast majority of architectural plans are not detailed enough to make this option work so it is very important that the architect be experienced at working in this way. The more thorough set of plans is then put out to bid. The builders are more accountable to their bids because all of the specifications and selections are clearly documented. The architect serves to help the client choose a builder based on experience in working this way. The plans are sent out to two or three builders who are experienced in building these types of homes and have a history of coming in on budget.
The plans are very detailed so the client should have a very good idea as to what they are getting and how much it should cost. There are also fewer decisions to be made during the build. Lastly, the architects provide an extra layer of oversight on the project so the fox is not guarding the hen house.
The price of homes done this way are typically more expensive for a couple of reasons. First of all, the architects are providing a lot of extra services and are therefore, more expensive. The second reason is that the details of the specifications that are being chosen by the architect can drive significantly more costs and are not necessarily the best “value” options. This results in a much more expensive home than necessary. This option also typically takes more time to design and build.
In the second option, the clients choose their team up front. This can be a design build setup or a separate architect and builder. The team is carefully chosen by experience and a reputation of building quality homes and bringing projects in on budget. The team works together to understand the goals of the client. The team collaborates throughout the design to ensure that the plans are in line with the established overall design and budgetary guidelines. When the plans are ready, the customer might send out the plans for a second bid as a sanity check before moving forward with the builder but the intent is to have the original team complete the project.
This approach is typically less expensive overall and quicker to implement. This approach is better for accomplishing up front budgetary goals. They are more easily accomplished in this scenario because the builder is generally more knowledgeable about the budgetary impacts of various design ideas. The builder is in a better position to properly set expectations without fear of losing the deal to an unrealistic competitive bid. Everyone on the team is working together in harmony to reach these goals from the outset. The client has a lot of interaction with the builder to ensure a comfort level with the integrity of the builder and personality fit with the builder before actually starting construction. There is more flexibility to make decisions during the build instead of trying to make all decisions up front.
A higher level of trust is required with the builder to avoid abuse of the more nebulous specifications. There is typically less oversight of the builder by the architect. While the client can elect to build with another builder, the builder has invested more time on the project so the client may feel more obligated to stick with the original builder.
As you can see, these are two very different approaches. Option 1 is typically a good fit for someone who knows exactly what they want in the house and are willing to pay whatever it takes to get exactly what they want. Option 2 is typically a good fit for someone interested in the best value or someone who has very specific budgetary goals that they are trying to accomplish.
In a both cases, it really comes down to selecting a team that you can trust. If the team has integrity, a good attitude, and the proper experience, then you are setting yourself up for success.
Please visit www.butterfield-shore.com