Volume 2: What are the top challenges when building a custom home?

According to the HOUZZ 2015 House & Home Report the top challenges when building a custom home are:

1. Staying on Budget

2. Staying on Schedule

3. Finding the right Products

In what order would you rank these challenges and how might that help you choose the right builder?

If you ask me how I would rank these top challenges, the answer is very easy. I would rank them all as number one. I typically begin each endeavor with a picturesque vision of the final result and everything I want the project to accomplish. However, in the end, reality always prevails. I’ve realized that when I find a project especially challenging the turning point for success is when I let go of something and embrace the decision. A very wise client once said to me “I’m old enough now to stop spending effort and time trying to change reality.” The reality of building a custom home is that these top three challenges can’t all be ranked at number one. You’ll need to decide how you rank them and then find the builder with the right business model for you.

When I read homebuilder reviews, I find that in general the positive reviews are from client’s whose priorities & expectations aligned well with the business model of the builder. The negative reviews often indicate that the client’s expectations were not met. These negative reviews/experiences can be broken into two categories.

1. Something went wrong and the builder did not fulfill the commitment/written agreement.

2. There was a disparity between the business model of the builder, the agreement, and the expectations of the customer. This is actually the most common issue.

Below is a graph that was included in the HOUZZ 2015 House & Home Report. While there are many categories we will focus on the top three and last one.

While I agree with this list, I would argue that ‘meeting expectations’ is the actual number one challenge and that most of this list could fall under this category. For example, if every client had a clear understanding of the cost involved in building a home, then the percentage of homeowners who ranked ‘staying on budget’ as the greatest challenge would reflect the occasional exception and not 52% of the 200,000 homeowners questioned.

‍

‍

The same can be said for ‘staying on schedule’ and ‘finding the right products and materials’. If every client had a clear understanding of what can disrupt a schedule or why some products are offered and others are not, then the gap of ‘expectations v. reality’ would be much smaller.

Contracts

Contract structures have a lot to do with cost and what you can expect. Each contract type will have different risk factors. The four most common types of contracts and who carries the risk are:

• Lump Sum or Fixed Price Contract – The builder carries most of the risk.

• Cost Plus – The homeowner carries most of the risk. (There are 4 additional common structures of this contract.)

• Time and Materials – The homeowner carries most of the risk.

• Unit Price Contracts – This is typically the fairest type because the risk is shared. However, in a build on your land scenario there are area’s you could go over budget, but the likelihood of being cheated is low.

Check out this great article by Juan Rodriguez for more information on different contract types.

Priorities

The order in which you prioritize budget, schedule, and products will determine how each of these is affected during the build. Staying in budget could mean going over on the schedule or vice versa. Below are how different priorities can affect your build:

Priority #1: Budget

Priority #2: Schedule

Priority #3: Products

• Budget – Select a builder that has proven results in delivering homes while staying in budget. The builder must be able to show you pricing in black and white. There may be some variables, but they need to be tied to a unit cost and you need to have control over or understanding of the potential variable. Make sure you understand all areas of risk. Lot preparation is one of the largest and most common areas of risk. If you are liable for unforeseen circumstances on lot preparation this could be where your budget gets blown. Select a builder with a fixed cost guarantee on lot preparation.

• Schedule – Don’t plan too much of your life around the completion date because it may move forward or backward. A builder with a fixed cost guarantee on lot preparation may have some weather disclaimers providing extra time if needed to let things dry out after a rainy period. This means the schedule will be pushed while the builder waits for the site to dry out. Your builder may suggest doing a ‘dig-out’ to keep things moving. This is where the wet soil is removed and dry soil is hauled in. This will keep the schedule from being pushed too far out, but it is expensive and could blow your budget.

• Products – Make sure that you are satisfied with all the products a builder has to offer. The ability to complete the build on time and within budget is improved by having some limits on what it offered since this removes unpredictability.

How can Dunn & Stone help you stay in budget on lot prep? We offer a fixed cost price that covers the majority of the real risks, one being a dig-out. We are able to keep the process moving and you don’t have to worry about the possibility of a dig-out blowing your budget.

Priority #1: Schedule

Priority #2: Budget

Priority #3: Products

• Schedule – Select a builder that has proven results in delivering homes on time. The builder needs to have schedule transparency and the ability to show you when they plan to accomplish certain tasks and when you need to have your tasks completed too.

• Budget – Make sure you have some room in your budget since you may need to pay for speed. Depending on the project, allow $10,000-$20,000. If your builder doesn’t offer fixed cost lot prep you may need to pay for something like a dig-out, which can cost in excess of $10,000.

• Products – Make sure that you are satisfied with all the products a builder has to offer. The ability to complete the build on time and within budget is improved by having some limits on what it offered since this removes unpredictability.

Priority #1: Products

Priority #2: Budget

Priority #3: Schedule

• Products – Select a builder that has extraordinary flexibility and does not have too many homes in progress at any given time (5 homes or less per project manager). You’ll want a builder that will allow you to shop around, bid vendors, and spend time searching for the perfect product.

• Budget – Cost plus contracts are very common in this area and can work well. It is paramount that you and your builder equally respect each other and that the rules are clearly defined. Lump-Sum/Fixed Cost contracts are also common. Many times this means an allowance is provided for each category of your home. Most of the time allowance is sufficient for the category, but there may be areas that you will go over and have to pay the difference out of pocket. For example, you may have an allowance of $20,000 for appliances. That seems like way more than enough. Then upon visiting the appliance store you see a built-in fridge and freezer that would look great in your home. It’s $12,000. You also find an awesome matching cook-top for $5,000. The double ovens you need are $3,000 and the dishwasher is thrown in because you bought the cooktop and oven of the same brand (hurray!). The microwave is $300. Wow, we did great! We only went over the allowance by $300! We should do this for a living! Unfortunately, it’s going to be over $300. The entire appliance package is $20,300 and the local sales tax is (8.25%) $1,674.75. The installation of these high-end appliances is $1,000. So that brings up your total (over the allowance) to $2,974.75 for which you will need to write a check.

• Schedule – Your schedule will depend on how much time you want to spend searching for the perfect products for your home. You’ll be the one traveling all over town looking at all the various materials, so your ability to spend time outside of work will impact the schedule.

Priority #1: Products

Priority #2: Schedule

Priority #3: Budget

For most intents and purposes this arrangement will be very similar to the Products 1st Budget 2nd with the exception being that your involvement may need to be lower. To get the products you want will come at a higher price because you’ll need to add a middle man. This is accomplished by using a more centralized distributor. They do the leg work and deliver products on time, but they must add their margin. Fergusson is a good example of this. They offer products from plumbing to appliances, tubs to mirrors and they can source great stuff, but they can’t do all of that for free. So that’s where your checkbook comes in.

Priority #1: Schedule

Priority #2: Products

Priority #3: Budget

This will be also be very similar to the Products 1st and Budget 2nd except that when you prioritize schedule and then products the budget completely goes out the window.

In the end, reality will always prevail. Having your expectations met or missed will determine whether or not you face the top challenges of building a custom home: staying in budget, staying on schedule, and finding the right products. Whoever you choose to build with, I hope you find yourself in the 5% minority. No challenges at all.

‍