Building a custom home (THE CONTRACT)

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PHASE THREE: THE RESIDENTIAL CONSTRUCTION CONTRACT

Once you approve the finished architectural plans and specifications, we will be ready to finalize the residential construction contract. This is the legal document that spells out precisely what we will build for what price and in what basic timeframe. As a general practice in our industry, there are two ways to frame a pricing policy in the contract:
1) fixed price, or
2) cost plus, a more flexible approach wherein we provide invoices outlining actual expenses plus a percentage of cost for supervision, overhead and profit.
We work equally well with each method and are comfortable with whichever structure you prefer.

The typical residential construction contract includes the following three documents:
1) the contract and all exhibits and addenda.
2) the architectural drawings;
3) the specifications
These documents define the three most important aspects of our contract:
1) the purchase price and the pricing basis (fixed or cost-plus);
2) a detailed description of exactly what we're going to build;
3) a detailed description of what features and materials go into what we're going to build.

In a typical custom-home project, our client has already purchased a lot and we contract to build the improvements on that lot. If a client purchases one of our inventory lots, there will be a separate lot-sales contract. This approach allows our clients to take out the interim construction loan in their name and, in most cases, write off the interest against their income taxes.

Change orders

We had a client once who showed us a photo of a capricious builder standing next to a large boat and the boat's small dinghy, docked in a marina. The dinghy was named "Original Contract;" the large boat was named "Change Order!" Unfortunately, that's the unrealistic image of the term "change order."

The reality of the matter is that with Sendero Homes (and most reputable building companies), change orders are inefficient, time-consuming and seldom benefit our company or our customer. In implementing change orders It can be very difficult to assess the "ripple effect" of any single change on the project as a whole. Certainly some changes can be easily accommodated, however, others can be surprisingly complex, affecting a number of items resulitng in additional expenses and delays.

Therefore we stress the importance of getting as many ideas as possible incorporated into the plans during the design process; this helps minimize the need for change orders. That said, we have never yet built a custom home without a change order ... and we likely never will. Therefore, each change order is in itself a new contract. Overhead charges for change orders will be assessed based on the time, risk and overall effect the change order has on the project. Change orders will be priced out at cost plus overhead and profit.

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