Builder Charging Flat Fee Question

Beth LaPennaJuly 28, 2012

This is my second time building a new home. I've bought the lot in the hill country and my blueprints are complete with the exception of a few changes I've made. I have interviewed several builders and have bids from three. One is cost plus, one is fixed contract price (I've eliminated this builder for other reasons) and the most recent one is cost plus flat fee. Both bids are comparable line by line in terms of scope of work and allowances for the total build. Both builders have general liability insurance which is included in the cost plus all their references checked out. What I'm flabbergasted by is that the flat fee builder (let's say his fee is 90K) is almost double the cost plus builder (cost plus 15% - with 15% being what the builder will be paid - in this case 50K). Yes, the flat fee builder has 2 accredidations that the cost plus builder doesn't have - but that certainly isn't worth 40K to me. This flat fee arrangement appears to be a new way of doing business for builders - any ideas on how to negotiate with this type of arrangement? Thanks..

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Tough to negotiate. What you can do is tell him that you really want to use him but can't justify the cost. I had a similar choice but it was closer to $10k so I went with the better reviewed person who happened to be flat fee vs 15%. Heck if we added enough stuff, the $10k gets eaten away.

It is tough to ask for a $40k reduction....But $90k on a $320k build cost is a bit ridiculous in this market. Is there a reason why he is so high?

    Bookmark   July 28, 2012 at 4:48PM
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Sophie Wheeler

I'd suspect the plain cost plus guy is banking on quite a few "allowances and upgrades" or even kickbacksto make up the additional and the ultimate fees will not be that far apart once that's taken into account.

    Bookmark   July 28, 2012 at 8:19PM
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Btex, are you going to be paying the subs? 90 grand flat fee for a house is too much unless you were building a manson. I know several GC's in this area and they also charge a flat fee but the homeowners are paying the subs at GC prices. NO MARKUP!! You get the house at cost! The home owners come out waaaaay ahead. The flat fee in this area averages around 55 grand. Does the 320 include this fee?

    Bookmark   July 28, 2012 at 10:35PM
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Beth LaPenna

Thanks for the comments. My thoughts are that the 90K builder thinks he's a shoe-in and believes I don't have other builder choices. Also I am an interior designer (an allied business) and don't need perhaps the level of decision making assistance that another buyer might traditionally need. I would think that would be be a time saver for the builder. A flat fee arrangement is probably a good fit for me as I'm familiar with wholesale pricing for flooring, lighting, plumbing fixtures, etc. so I have a rough idea of costs and whether allowances are in the ball park. That's why I'm baffled that his flat fee is so high.

robin0919: He is flat fee (includes insurance) plus the exact cost the subs, engineers, etc. are charging him and that is the figure I have in hand.

I'm not a math wizard, but he is telling me that his flat fee is "only 15 percent" of the grand total of the house with his flat fee already added to it. His fee is closer to cost plus 22% if you take the actual cost and add his fee to it. It seems I wouldn't calculate his flat fee percentage with it already added to the actual costs. Am I looking at this correctly?

    Bookmark   July 28, 2012 at 11:56PM
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You are looking at it correctly.
But, he is free to draw up his contracts as he'd like.
Now it is your job to decide which fee you want to pay (or negotiate).
Cost plus is cost of the build plus a % fee at the end
cost +fee plus a %fee at the end.

    Bookmark   July 30, 2012 at 11:21AM
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Could I butt in with a related question? I'm the one
who (in an earlier thread) wanted the architect to do
everything, but has to be reconciled to finding a
builder more or less on my own. Cost-plus-a-fee would
seem to be appropriate only for a client who can
evaluate the estimate intelligently. As a total layman,
I'm willing to pay a little more to have the builder
assume all the risk. What's not to like, then for
interviewing only builders who will bid fixed-price?

    Bookmark   July 30, 2012 at 3:55PM
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Fixed price encourages a builder to take the cheapest route possible. Cost plus encourages a builder to the most expensive route possible. Cost plus fixed fee gives the builder no particular incentive to spend more or less.

Fixed price makes most sense in budget builds or builds where every detail is spelled out.

    Bookmark   July 30, 2012 at 4:13PM
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hmmm...not so sure I would use the word 'cheapest' for FP.

For sure our FP contract had basically everything spelled out & the material & quality is definitely not cheap.

The burden is on the purchaser to do all the analysis & decision making up front on all the choices as oppose to being flexible & on the fly.

It's simple business 'physics' - more indecision means more cost.
Not Cheap by any means.

    Bookmark   July 31, 2012 at 11:08AM
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It isn't necessarily the cheapest but the builder has the incentive (when not spelled out) to use the least expensive option.

So you can use this name brand bracket for $.50 or this cheap knockoff for $.20. Builder uses the knockoff to save some money.

    Bookmark   July 31, 2012 at 11:55AM
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Our builder is wanting a flat fee of 95k +35k site supervisor fee as well. The build is 500k build. Is this ridiculous? We really like him but at that price we will not be able to use him.

    Bookmark   July 31, 2012 at 12:34PM
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I tend to agree that people in general will use less expensive components when all else being equal.

However, I think in regards to bigger components like frame or insulation, a consumer has to get educated somewhat.
But when nuts & bolts & brackets are discussed - the non-trade home buyer - will not know if a bracket or other minute nuts & bolts is better one way or another IMO.

Not many people will get into that type of gritty detail in any of the cost structures.

Not sure if OP is hiring a general contractor who will manage & sub out the work or a construction company??

The former is what most people hire.
The latter, are for some1 who wants to be part of every decision.

Therefore, I think the OP needs to define what level of interest as a custom home builder they are willing to BE

In our own experience - we chose somewhat hybrid model based on the former.
We wanted essentially more of a flexibility & pricing advantage that goes with custom build (fixture & selections) but without too much of the construction management we are not experience in (ala a tract type build).

We still get to state the types of joist/flooring & get it priced.
But nuts & bolts? Only guarantee is the floors won't squeek. LOL!

    Bookmark   July 31, 2012 at 1:50PM
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"Cost Plus" is a common abbreviation for a contract where the general contractor is paid the "Cost of the Work plus a
Fee". The contract form is the same whether the "Fee" is a percent of the Cost of the Work or a Fixed amount. Which Fee type is used should be decided by the Owner and stated in the Request for Bids. It would be very difficult to compare the proposal from Contractors who did not use the contract and fee type requested by the Owner.

It is common for larger projects that the Owner asks the Bidders to propose a "Guaranteed Maximum Price" and sometimes there is also a "Shared Savings" if the contractor does not reach the GMP. IMHO this is by far the best contract type especially if you are in a hurry to complete the project but it requires a higher level of professional contract administration by both parties.

    Bookmark   July 31, 2012 at 3:29PM
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For "shared savings" to work, one has to assume that the builder will act in good faith when reporting his costs...correct?

While we're talking about incentives, how about bonuses for completing early and/or penalties for being late? Is it customary (or brilliant or stupid) to ask the builder to include a proposed schedule as part of his bid?

    Bookmark   August 1, 2012 at 3:40PM
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My builder charged $15000 on a $315,000 build in the Dallas area.

All changes were direct costs only. He self performs the masonry, paint, and stone work. He may have some built in profit on those items.

Any savings from the original budget come back to me as savings. Any items that go over budget that were the result of a bad takeoff are no cost to me. But the permit costs were higher than estimated due to a change in rules at the city. He will pass that on to me. I have no problem paying since that was not in his control.

    Bookmark   August 1, 2012 at 4:08PM
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Only $15,000 fee for a house worth $315,000? That's only 4.76% builder fee? it is a steal.
Could you post the builder name in Dallas?
I need such a builder.

    Bookmark   March 26, 2013 at 10:37PM
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He's probably out of business. No one can do margins like that and keep the lights on and the kids fed.

    Bookmark   March 27, 2013 at 9:09PM
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That builder got paid as the sub for a lot of the work which was billed as part of the Cost of the Work so he was asking for a small fee for also managing the project. The difficulty with this arrangement is that his sub bids are not competitively bid; he could be paying himself quite well for that work.

Savings are usual shared 60/40 to provide an incentive to stay substantially below the Guaranteed Maximum Price. It should be difficult to get a contractor to agree to a GMP without a Shared Savings.

Yes, the Cost of the Work must be documented with receipts and invoices and even discounts and kick backs must be included. Since this evidence is sent through the mail, any falsification can be considered mail fraud and subject to federal prosecution if you can get the feds to bother with such a small crime. But a contractor would have to be a fool to try it.

    Bookmark   March 27, 2013 at 9:30PM
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Renovator8 - Is GMP the number I go to bank with as 'cost to build'? And if the final CTB is below GMP, and we agree to split the difference 60/40, I would still be paying the GMP as my mortgage, right? (especially with only 1 closing prior to the build)

    Bookmark   March 27, 2013 at 10:04PM
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That seems correct but I've never borrowed to build.

    Bookmark   March 28, 2013 at 5:44AM
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If you are only going to close once, I would ask if the loan is able to be reamotoritzed after closing for a fee. Lots of larger banks offer this. So, if you closed for the full GMP and saved money along the way, you could apply the balance to the mortgage and it would immediately lower the interest to be paid on the loan. However, if you want to lower your payment, you could ask the bank to reamortize the loan (fee is usually 100-200 dollars). They would then apply the "extra" money in your mortgage that you used to pay down your loan and come up with a new balance owed and make payments on that.

Only some banks and some loans offer this but it seems like a great way to pay down your loan and lower your payment if you come into a chunk of cash without refinancing. Would also be useful if you haven't sold your first house, for example . . .

    Bookmark   March 28, 2013 at 11:06AM
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