Builders use different types of contracts. For example, some builders will bill by the hour, while others will quote the price in advance and charge that amount. The latter approach is known as a fixed-price contract. These are incredibly common, but the builder and their customer should nonetheless consider the different pros and cons of using one.
Helps with budgeting
The fixed-price contract is generally most beneficial to the homebuyer because it helps ensure that the project has a predictable budget. Moreover, lenders also like fixed contracts, so they know the project is not going to go over budget or need to lend more money. As with nearly all business contracts, the agreement will include clauses or contingencies. However, many believe there is less chance that the job will go over the amount if the buyer only agrees to the amount in the contract. If the clauses are invoked, disputes or complications may arise over who will pay the additional expense.
There are risks
A fixed-price contract can be risky for the builder. If they estimate wrong or if there are unforeseen delays or other issues not covered as a contingency, the costs and labor resources needed for the job could increase over what they initially estimated. It impacts the bottom line, and the builder does not profit as they expected for their work.
What about those contingency fees and clauses?
As mentioned, contracts will typically include contingency fees and other such clauses. While the builder may estimate much higher than they think the job will cost, this can unnecessarily push up housing prices for the buyer. Whether this luck of happenstance or planned, higher profits can be a positive for the builder. But the clauses allow them to bid lower, knowing foreseeable cost overruns will not come out of their pocket.
Drafting the right contract for the job
Considering the amount of money involved in the typical real estate transaction, contracts play a significant role. Whether it is fixed-rate, hourly, or another approach, it’s wise to consult an attorney who understands the nature of construction costs, the risks involved, and how to best address all necessary or foreseeable issues. They will outline what documents they need, what they agree to and what legal action they may take to resolve the issue.