Understanding Custom Home Builder Contracts

One of the most essential, if not the most essential element of the entire custom home building process is the custom home builder contract. Before you officially start building a custom home, you’ll sit down with the custom home builder you’ve selected to sign the agreement with all the details of your new home build. 

As with any contract, there are variations in how custom home builder contracts are structured and what they include. To help you better understand builder contracts, we will go through general inclusions you can expect to see and the different types of residential construction contracts, along with insight into the pros and cons of each type.

Goal Of The Custom Home Builder Contract

At its core, the reason for a custom home builder contract is to ensure that you get the house you’ve asked for and that your home builder gets paid for the house they build. As with any contract, a custom home builder contract should also outline the rights and expectations of both parties so that everyone goes into the home building process with the same expectations about what needs to happen when, reasons why it may not happen and how those situations will be handled, and how to resolve any potential issues or disputes.

Information Included Custom Home Builder Contracts

All home builder contracts should outline this information in a specific and easy-to-understand format so that everyone is on the same page.

While there will be variations in contract inclusions from builder to builder, these are a few items you’ll want to be sure are included in your custom home builder contract.

1. A Clear Scope of Work

The scope of work should outline who is responsible for what and when. This includes what is included in your home builder’s work and what you, the owner, may be responsible for. It’s common to make assumptions about what may or may not be included, but the contract is where everything should be outlined. If there is a particular item you don’t see listed, make sure to ask.

You’ll also want to look for information about if and how changes may be made to the scope of work and details on when this can or can’t occur. It isn’t uncommon that custom home builder contracts have information on certain points in the build process when changes, or certain types of changes, are no longer allowed. 

This section of the contract is particularly important to review because the inclusions can vary widely from builder to builder. As an example, some custom home builders do not include interior or exterior paint as part of their scope of work. 

In our own agreements at Pathway Builders, we include submitting your home building permit application, but we do not include payment of the permit fee as we don’t want to add additional cost for our customers for something that is a straightforward and simple item to take care of unless of course, they prefer to have us take care of this.

In contrast, there are also many builders that don’t include submitting the building permit application, so you need to thoroughly understand what is included. Hopefully, you’ve had an indication of this before you selected your home builder, but the inclusions in the scope of work are important to understand the price differences you may see from builder to builder and the value that you are getting from each.

Our goal is to provide our customers with the most value so we focus on inclusions that make the home building process easier and those that add the most value to the home. If something isn’t included in our standard, there is likely an option to include it so that our customers have the home building experience they are hoping for with the inclusions they need. 

2. Timing & Scheduling Details

Among the details in this section, you’ll want to review the planned timeline and schedule for the work being done. This should include any specific timelines for items you are responsible for as well as items the builder is responsible for. 

All residential construction contracts, and particularly on your land home building projects are susceptible to potential delays. This can be unforeseen soil conditions, delays due to late payments, weather-related delays, and permitting delays among others. 

In southwestern Idaho and Boise area where we build custom homes, two of the more common reasons for a delay are particularly wet weather periods resulting in flooding or additional standing water or winter weather. These types of weather can cause additional work that can slow the process down.

Wherever you are located, the most common reasons that a delay may occur should be outlined in your agreement along with information on how this may change your pricing, payment schedule, or the schedule of your home build.

3. Cost & Payment Terms

One of the most important sections of your custom home builder contract: the cost to build. Every contract should include the cost and payment terms of your new home build. There are several common home builder fee structures that we’ll review, but make sure that the cost is outlined and whether your cost is an estimate or the final fixed price. If it is an estimate, the contract should stipulate how the final cost is calculated.  

All builder contracts, even those using a fixed price, should stipulate reasons that may incur additional costs. 

Payment terms should have information on the schedule of payments, when you’ll need to submit payments by and how to submit payments. With residential construction projects, it’s likely you’ll make payments once certain construction milestones have passed. This is in line with how construction loan funds are dispersed.

Some custom builders will include different fee schedules for customers paying cash versus financing their custom home builds. Make sure you are aware of what the payment schedule is for your particular situation. For more information on financing, see our guide for the fundamentals of financing a custom home.

You should also see information in your custom home builder contract about what happens if any payments are late in terms of the penalties or additional fees charged.

4. Warranty Information

Any reputable custom home builder will include a warranty for their work. It’s something we recommend asking about when you are in the process of choosing your custom home builder. The inclusions, limitations, and timing of any warranty should be included in your custom home builder’s contract. If you have questions about the warranty or how warranty items are handled, ask your custom home builder before you sign the contract. 

5. Dispute Resolution

6. Essential Notices

Although it varies, most states have specific laws related to custom home building and information that must be shared, reviewed, or disclosed by your contractor or home builder. If this is the case in your area, you’ll typically see this information included in your contract.

In Idaho, all general contractors are required to provide certain disclosures to any homeowner or purchaser about their rights and the contractor’s obligations under the law. Idaho also requires a statement and a disclosure regarding radon and mold. 

As a custom home builder in Idaho, these disclosures are included in all of our home building contracts. Depending on the law where your project is located, you’ll likely see some form of disclosures or notices as part of your custom home builder contract.

This is a non-exhaustive list of contract inclusions. You can also expect other standard information such as names and addresses of both parties and location of the property your custom home will be built on, among other things.

All custom home builder contract inclusions will have some variation, but if you don’t see at least the information outlined here, be sure to ask about it.

Don’t assume that something you talked with your builder about is included in your custom home building contract. If it isn’t in writing, be sure to ask about it. If you aren’t clear on the meaning of something in your contract, make sure to ask for clarification.

Because there can be several weeks or months between when you first talk with your home builder to the time your contract is created, it’s possible something you talked about initially was forgotten. This is why it is always better to ask than make an assumption about what is or is not included in your contract.

If you haven’t already asked your home builder, before you sign the contract is a good time to confirm they are properly licensed and insured. Most states have requirements about contractor licensing that apply to home builders as well as insurance requirements. These are in place to protect you as the owner and it’s not uncommon to ask for this information. Any custom home builder you work with should be able to provide you with this information easily.

A part of the required disclosures for contractors in Idaho is that you have the right to receive proof of liability insurance and worker’s compensation insurance from your contractor. At Pathway Builders, we include proof of insurance in all our contracts so that our customers don’t even need to ask.

Common Types of Custom Home Builder Contracts 

In residential construction projects, the type of contract is primarily defined by the payment terms. There are two common types of custom home builder contracts that we will cover here. This includes cost plus builder contracts and fixed price contracts. The type of contract you use will depend on the builder you work with and your preferences. If you know you’d like to use a specific type of custom home builder contract, you can ask about contract types when you are choosing your custom home builder.

Cost Plus Builder Contracts

In a cost plus custom home builder contract the owner pays all construction costs along with a builder fee that is either a fixed or flat fee for the project or a percentage based fee. These contracts are known as cost plus fixed fee (or fixed fee contracts) and cost plus percent fee contracts (or standard cost plus contracts).

Cost Plus Fixed Fee Builder Contracts (also known as Fixed Fee Contracts)

In a cost plus fixed fee contract, the builder agrees to build your custom home for a fixed fee added on to construction costs. This fee is usually paid during the build in a set payment schedule. In this type of home builder contract, all construction costs of the project are paid by the owner and the fixed fee is paid to the builder on top of construction costs.

Benefits Of The Cost Plus Fixed Fee Contract

• You’ll know exactly how much you’ll be paying for your builder’s fee up front
• This fee won’t change during the course of your home build, even if the cost of labor or materials goes up
• You have more flexibility to make changes during your project without increasing the amount you pay your builder
• It’s not as necessary to make all your design decisions before your project starts; however, to shorten your project timeline and better understand your construction costs, we always recommend making your design decisions prior to signing your contract. 

Cons Of The Cost Plus Fixed Fee Contract

• The total cost of your home build can change over time due to project changes, rising cost of materials or labor, and unforeseen delays
• The cost of the builder’s fee may be higher than in a fixed-price contract because the builder needs to price in the impact of unknown changes to the plan
• There is no incentive for the builder to keep the cost of labor or materials down
• Your builder could be stuck in a situation where they are losing revenue due to frequent owner changes. If a builder feels they are being taken advantage of in this scenario, it could impact quality or customer service

Because this contract type doesn’t give your custom home builder much control in terms of finishing a project or estimating their returns and because homeowners bear the risk of any rising cost of labor and materials, this contract type is less ideal for both parties. However, in a situation where you need flexibility with your project and you are willing to bear the risk of increasing costs, a fixed fee contract may be reasonable.

Cost Plus Percentage Fee Builder Contracts (also known as Cost Plus)

In a cost plus percentage fee custom home builder contract the owner pays all construction costs, just like in the fixed fee contract; however, instead of a set fee the builder’s fee is a percentage of the construction costs. 

This type of contract is common for large construction projects where the time between the start of the project and the end of the project may be significant. This is because any change in price can be hard to factor in over a long period of time so the owner is responsible for any change in price. 

Another scenario in which the cost plus percentage fee builder contract is popular is for very unique or complex projects. In this case the builder estimating the total cost to build is more difficult for the builder, so the cost plus percentage fee contract makes more sense in protecting the builder from underestimating the cost and the owner from overpaying for an overestimated cost.

For cost plus percentage fee custom home builder contracts, the builder fees can range, but are typically between 12-20% depending on the size and complexity of the project.

Benefits of Cost Plus Percentage Fee Contracts

• Typically the price you pay the builder is lower because the builder doesn’t need to price in a large contingency budget. This is because their fee is proportional to the cost of construction and the risk of rising construction costs is fully on the owner
• There is more flexibility to change the project with no need to negotiate any pricing for change orders as it’s already set as a percentage of the price increase
• It’s not as necessary to make all your design decisions before your project starts. However, at Pathway Builders we always recommend making your design decisions prior to starting your project. Doing so, can keep your project timeline shorter, helping you move into your new home faster. You’ll also have the benefit of a better estimate of the total cost to build your custom home if you have your design decisions made prior to your project start.

Cons of Cost Plus Percentage Fee Contracts

• Similar to the fixed fee contract, the total cost of your home build can change over time due to project changes, rising cost of materials or labor, and unforeseen delays
• Changes in construction costs or materials will also result in a higher total cost paid for your home build because you’ve agreed to pay your builder a percentage of this fee
• There is less incentive for your custom home builder to complete the project quickly and affordably because they are paid based on a percentage of the total project cost

The cost plus percentage fee custom home builder contract is one of the more common contract types, especially for homes that are highly customized as it eliminates the builder from having to try to estimate a project that is unlike others they’ve worked on. This can result in a lower cost for builder fees to the owner.

At Pathway Builders, there are occasions when we use the cost-plus contract and it is typically when we are building a home that is much different from one of our custom house plans.

Fixed Price Contracts, aka Lump Sum Contracts or Stipulated Sum Contracts

In a fixed price custom home builder contract, the price you pay for your project is fixed. Unlike the other two contract types we’ve already covered, in this contract type the price includes the construction costs. When this contract type is used the owner pays their custom home builder in percentages of the total as home construction progresses adding up to the total cost to build by the final payment. 

This type of contract is common when there is a clear scope of work so the builder is better able to estimate the total cost of the project. If changes are made to the scope of work after the contract has been signed, there will be an additional cost added to the original fixed price.

When this type of contract is used, if all selections haven’t been made ahead of time, home builders will usually include certain allowances, or budgets, for selections of items like appliances, flooring, and cabinets. As long as the owner chooses options that are among the standard options they won’t pay more for these. However, if an owner suggests an option outside of the standard, there is likely an additional cost to the fixed fee.

Benefits of Fixed Price Contracts

• You know the exact cost of construction when you get started with your project
• The risk of increasing cost for materials or labor is passed on to the home builder 
• There are fewer financial surprises because the total cost is listed in your contract
• The only things that increase your total project cost are voluntary change fees or unforeseeable circumstances, such as municipality requirements or weather conditions
• The home builder is incentivized to complete your project quickly

Cons of Fixed Price Contracts

• The home builder has to build in a higher contingency cost, which may increase what you pay your builder
• There is less flexibility to make changes to your plan without increasing the cost, so it is better to make your design decisions before you get started with your project
• If there are allowances included and you choose an option that costs more than your included allowance, this can increase the cost of your home build

Because our focus at Pathway Builders is on value and affordability, we do our best to price our home builds accurately without adding unnecessary cost to our customers. 

This means we are continually looking at pricing of materials and labor and the potential for price changes. We have created an instant price quote tool to help all of our customers get a more accurate estimated price of their home build that factors in custom selections and location before they’ve even talked with us. 

We also focus on helping our customers make their design selections before their build starts to eliminate the need for included allowances or change orders. 

Of course, we know that you want to maintain the ability to customize your home and make changes, it’s why you’re building a home in the first place! But, we do our best to help you with these decisions in advance so that you benefit from a more affordable price to build your home without sacrificing quality.

For these reasons and because we’ve found most of our clients prefer to know the total cost up front, the majority of our custom home build contracts use a fixed price. 

Before we sign the contract, we include a scope of work that includes all of your design choices. This eliminates the uncertainty of needing to use allowances, meaning the reasons the cost of your build may go up are even fewer. We’ve found that this contract type and eliminating the need for allowances has improved our customer’s experience and allowed us to keep our rates more affordable.

Conclusion

Whether you end up with a fixed price builder contract, a cost-plus builder contract, or another type of custom home builder contract for your new home build, the bottom line is that you want to make sure you understand the information outlined in your contract. 

Have an understanding of your responsibilities, payment schedules, ability to make changes, and items that may increase the cost of your build. Also have an understanding of what you can expect from your custom home builder.

If you aren’t sure what a specific section of your custom home builder contract entails or you have questions about the inclusions, be sure to ask. Understanding your home builder contract up front will ultimately provide you with a much better home building experience.

Interested in building a custom home on your land in the Boise area or southwestern Idaho? Contact us. We’d love to talk with you about making your dream home come to life.
Liked this content? View more of our custom home building resources.