What to Know When Choosing a Quality Home Builder
Building a custom home is a sophisticated endeavor involving many relationships and important contract obligations. Selecting the right partner with the aptitude and capacity to do your project well is critical to both your project’s success and your financial and emotional well-being.
We too-often hear stories of projects facing challenges in timing, extended budgets, or completion issues. These circumstances can result in unforeseen cost increases and, in some cases, the owner may be liable for the remaining costs to complete - or end up having to pay twice. Unfortunately, these additional costs can put a family in a very difficult financial situation.
We’re committed to operating a responsible and financially sound business. Our ability to fulfill our promises and support highly skilled individuals with profound technical expertise sets us apart. As part of our dedication to your peace of mind, we'd like to offer some valuable insights on how you can make an informed decision when selecting your builder.
How to protect yourself from Challenging scenarios
Scenario 1: The Classic Pricing “Bait and Switch”
It’s not uncommon for some builders to quote an artificially low project budget to attract clients. The reasons for this may include lack of experience, oversight, or poor business ethics. The reason could also include simply not doing the appropriate work during preconstruction. In this scenario, the owner is likely to encounter significant cost overruns dealt with either through the change order process or through scope concessions as the project moves forward.
Construction materials and labor are traded in an extremely competitive and efficient market. All builders pay the same for concrete, lumber, drywall, and (generally speaking) trade labor. In a competitive pricing situation on equivalent scope, our experience shows that peer contractors should be within 0.5%-1.0% of each other on overall cost. If you’ve decided to competitively price your project, a variance in excess of this means that something is off, and it’s worth investigating.
What to look for and how to protect yourself:
Check to make sure everything is accounted for in the bid. Select a builder who is thorough and complete in their pricing process and who understands the details of your project. Ask to review the takeoff sheets to make sure they match the scope and product quantity of your project.
Be clear about what you’re asking the builder to price. Start with a good set of architectural plans and clear design direction to get pricing as accurate as possible.
Understand your contract type, and include protections. Require a stipulated sum or guaranteed maximum price contract which fixes the builder’s price to a capped amount for a specific scope. Limit allowance categories as these are components which could be artificially low and could misrepresent the actual cost of work, only to be reconciled later.
Ask to review the actual subcontractor quotes from the competitive marketplace to be sure the builder’s pricing model reflects up-to-date and accurate market pricing.
Scenario 2: Contractor Insolvency
Your builder’s ability to pay subcontractors, procure materials, and properly staff your project largely relies on the capacity of their balance sheet and their current liquidity. In some instances, a builder may not have properly forecasted and budgeted working capital and end up over-extended on project commitments, which puts them in a liquidity crisis. When builders deplete their business’s working capital, they start to rely on draws from current projects to pay past projects’ obligations.
In this scenario, payments you’ve made on your project may be used to pay for materials and labor on someone else’s project, and you might have no way of knowing if this is happening. When this happens, it’s only a matter of time until the builder goes insolvent, at which point you may end up paying twice to get the job done — you’ve already paid your builder, but if your builder didn’t pay the subcontractor, you will end up with a lien against your home for bills that your builder didn’t pay. Unfortunately, we see this happen too often, especially in times of market pullback.
How to protect yourself:
Require your contractor to provide lien releases for all subtrades at every pay application (pay period). Be sure that subcontractors have been paid fully for work completed for the prior month’s draw, and follow up within 7 days of release of your draw funds (which is required by the AIA contract standard) to ensure subcontractors have been paid. Your builder should be required to provide you with conditional and unconditional lien releases when they provide a Pay Application and updated unconditional lien releases after they’ve been paid.
If you have any concern about the financial health of the builder, require that the builder post a pricing and/or performance bond for the project.
Ask to see the builder’s Statement of Bondability from their surety or a current balance sheet. Alternatively, you could ask your builder to submit a Contractor Score to verify their financial capacity to take on your project.
Check your builder’s history to see if they’ve closed previous businesses. Often a history of closing old businesses and opening new ones indicates they may have previously been insolvent or have run into legal issues. Look up their specific name(s), as some folks will change the wording of their name to conceal this history.
Check your builder’s legal history (this is difficult to do) and/or ask them to disclose if they’ve ever been in a lawsuit or ever been bankrupt. This is a reasonable request during the interview process.
Scenario 3: Construction Defects
Our team takes great care in quality construction, and we have been contracted to repair other builders’ major construction defects in projects. Unfortunately, defective construction happens more frequently than most are aware. The builder’s role in scoping, guiding, coaching, training, and overseeing the quality control of the trade crews is absolutely crucial to getting details right and ensuring your home is built following the proper details and to a definitive, high quality standard.
How to protect yourself:
Start with a builder who has a deep knowledge and command of the technical details. They should be able to walk you through how they’re going to construct each complex detail of your project with confidence.
Understand how the builder intends to staff the project. Be sure there is adequate support at the operations/accounting, project management, project engineering, and superintendent (onsite management) roles. Ask to interview the staff of each of these roles, and get confirmation from the builder as to their current workloads and forecasted project allocations. How much time will they really be able to dedicate to your project and to supervise the work? As a general rule, we limit a single Superintendent to no more than 3-4 concurrent projects depending on project size and complexity. A higher allocation than that results in the risk of important details getting missed, mistakes being made, or not having adequate time for project planning and preparation.
Require that the builder adhere to, at minimum, the NAHB standard, and that they contract to that standard (contact us if you’d like a copy of that standard).
Consider requiring an independent third-party progress and workmanship inspection, in addition to the bank’s inspection, at each draw.
Visit a few jobsites that your builder is currently working on. Are they clean, organized, on-task, and showing active progress? If not, be sure to understand why. Slow progress doesn’t always mean it’s the builder’s fault, but it could be.
Ask to speak with references, especially folks who have been in their homes for over a year. How has their home held up - are they dealing with water intrusion, foundation settling, thermal, or other issues? These are key areas to understand the builder’s construction process. The Central Washington region has harsh weather extremes which require a lot of considerations during the construction process to make sure the home’s assemblies and systems were installed correctly. It may take a couple of years to know whether they’ve done a good job.
Other considerations:
In addition to hiring only the best and brightest construction talent, we support the quality standard of our teams through a proprietary and extensive 100+ page quality assurance guideline document that standardizes the construction of each aspect of your home. This is a thoughtful, structured and strategic approach to meeting our quality standards throughout. While these documents are often proprietary, you could ask your builder to show you how they manage QC/QA, or walk through the construction of your home and describe how they approach specific elements of the construction process. If they haven’t thought through each aspect of the construction process, ask them how they manage and control quality.
Scenario 4: Builder-weighted Contract
We often hear stories of folks signing contracts which are written greatly in favor of the builder, leaving them with limited options for seeking accountability in case of issues. This can become a problem when the project is in progress, possibly facing challenges like budget adjustments, extended timelines, quality concerns, or in the worst cases, a builder who refuses to finish the project. Unfortunately, even if they wish to pursue a different partner, they may have little legal recourse to terminate or hold their builder accountable to their original promises.
How to protect yourself:
Review the contract language closely, and understand the difference between reasonable structures and clauses vs. those which put the builder at an unfair advantage. Some things to look out for include non-refundable deposits, cost-plus arrangements (except in the appropriate circumstance), indeterminate cost controls, the lack of a project schedule, and/or limited termination options.
We highly recommend using a contract derived from the AIA (American Institute of Architects) or based on the AIA standard. The AIA is an independent institute and the gold standard for guiding contract delivery methods. The AIA’s approach holds the builder to a high standard, protects the owner by requiring significant performance commitment by the contractor, and also describes and balances the roles and responsibilities of the project team.
Finally, use your best judgment. Building your home is a significant investment as well as a technical and complex endeavor. It’s worth the effort to dig deeper than the sales presentation and fancy pictures on the website to understand how your builder runs their business.
Building your home should be an exciting, stress-free, and rewarding experience. Taking steps to select the right home builder will ensure that your custom home is built up to your quality standards, prioritizes your design preferences, and is constructed within your budget and without issue.
For more information and things to consider while building your home or taking on large renovations, follow our blog for updates. Not sure where to start in your home building process? We’re here to help. Contact us today for a personalized consultation and recommendations!