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How does your builder determine how much your home will cost to build?

The Estimated Cost Breakdown of your home is probably one of the most important forms in the construction loan package. This is the breakdown of each particular cost of construction of the home. The cost breakdown consists of numbers for your foundation, lumber, framing, plumbing, heating, electrical, painting, and builder's profit, etc.

The builder usually completes this form to show you exactly what it will cost to build your new home. The most important thing to remember here is that you do not want to underbid any line item and you do not want to overbid any line item.

You want accurate numbers from real bids (not guesses) and a 5% contingency for cost overruns. Most banks add a 5% contingency over and above the builder's contingency for added protection.

Good builders will send out the house plans to their contractors for specific bidding on each main item or can estimate the home themselves. The builder will send one set of plans to the foundation contractor, one set of plans to the framer, one set of plans to the plumber, etc, etc. When all the numbers come in, the builder will fill out the cost breakdown and come up with a total cost to build your new home.

Most builders will provide the contract but make sure you read it carefully and that you add your requirements as well. There are two types of contracts

1. Fixed Contract: This contract is simple and straightforward. Take the total of the cost breakdown and put that fixed number into the contract. The builder will provide a list of responsibilities.
2. Cost plus Contract. This type of contract is usually meant for large construction loan projects. This type of contract is utilized when the customer wants to make a lot of changes to their home as its being built. With large homes the construction loan period to build the home is usually 18 months so construction costs can change drastically. Builders prefer this contract to protect the costs and profits over long periods of time.

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