Building costs

When the building plans and specifications for your custom built new home have been completed, it will be time to figure out how much it will cost to build your home. This cost estimating process is when the builder can really "nail down" the cost of constructing your home on the site you've selected. Many plans and cost estimates will be needed for bidding, approvals, financing and construction.

Estimating the cost of building a home isn't a science, it just involves variables and unknowns. The builder must visualize the home in three dimensions from a set of two-dimensional house plans. Most builders will visualize building the home during the estimating process. That's why it can take many hours to produce an accurate cost breakdown of a home.

The cost breakdown usually contains four types of cost components:

Fixed costs
Once the building plans and specifications for a custom built new home have been completed, it will be time to figure out how much it will cost to build the home that's been designed.

Bids
Don't be surprised if the estimated cost of building a new home based on the initial design far exceeds your stated budget. Even with close scrutiny on the part of the builder during the design stage, a "busted budget" is almost inevitable.

Estimates
So what exactly is "incentive money" when buying a new home? Not all builders offer it; sometimes you only see it offered on the last few homes in a builder's subdivision at close-out. Is it just "incentive money" provided by the builder to spend at the builder's design center, or a way to help out with out-of-pocket closing money in the form of "closing costs"?

Allowances
One of the first steps in the home-building process is to investigate and analyze your financial situation and find out how much money you'll have available for the purchase or construction of your custom built home.

Preparing a cost breakdown
The cost breakdown is a summary of the suppliers' and subcontractors' bids, the builder's estimates, the projected allowances, buyer's financing costs (e.g., loan fees and interest), the costs for various permits, sums paid to purchase the land and the building plans, utility hookup fees and the builder's margin or profit.

Preparing a cost breakdown may look easy, many gaps and gray areas in the project may reveal themselves during the estimating process. A good estimator can arrive at an amount within 2 percent of the actual cost and the best estimators can pinpoint the actual cost within 1 percent. A poor estimator can be off the mark by as much as 10 percent or more of the actual cost to build a home.

The builder's fee typically will be a percentage of the total cost of the home or a fixed amount, depending on the type of contract you and the builder agree to use for your project. Whether the builder will show you the cost breakdown, guarantee a fixed price and include a warranty also depends on the type of contract being negotiated.

Obtain competitive bids
Many custom home buyers feel it's appropriate to obtain competitive bids from three or even four builders. Some builders believe obtaining multiple bids is a futile exercise even in a busted budget situation because it's difficult for buyers to compare bids from different builders. Builders also warn that quality and value are more important than a low price, low bids later can turn into cost overruns later.

Many builders argue that getting multiple bids won't necessarily achieve the buyer's goal of having the best possible home built for the lowest possible price. A very low price on the front end may mean very poor service on the back end or, even worse, a poorly built home.

If you solicit competitive bids, make sure the builders use identical sets of plans and specifications and that when the bids are received, they are comparable on an "apples-to-apples" basis. If the bids are comparable, the builder's prices most likely won't vary by more than a few percent.

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