Builder Contracts | Things to Think About
Fixed-Price vs. Cost-Plus Construction Contracts: What Texas Homebuyers Should Know Before Building
Building a custom home is exciting, but it also comes with a lot of questions.
How do you choose the right builder? How much should you budget? How long will construction take? And one of the biggest questions of all:
Could my custom home end up costing more than I originally expected?
The answer depends on several factors, including your builder, selections, changes made during construction, material and labor costs, and—very importantly—the type of construction contract you sign.
Understanding your construction contract before building can help you identify potential costs, ask better questions, and prepare financially for the project ahead.
Quick Answer: Can a Custom Home Cost More Than the Original Price?
Yes. Depending on your construction contract, allowances, upgrades, change orders, material costs, site conditions, and other factors, the final cost of building a custom home may be different from the original estimate.
Two common approaches you may encounter are fixed-price contracts and cost-plus contracts. The exact terms can vary considerably from one builder and contract to another, so it's important to understand what is—and isn't—included before signing.
What Is a Fixed-Price Construction Contract?
A fixed-price contract generally establishes an agreed-upon price for the construction project based on a defined scope of work, plans, specifications, selections, and other contract terms.
However, the word “fixed” doesn't necessarily mean that the final amount can never change.
Depending on the contract, additional costs may arise from things such as:
Change orders requested during construction
Upgraded finishes or selections
Allowances that exceed the budgeted amount
Unforeseen site or construction conditions
Changes in the scope of the project
Items specifically excluded from the original contract
Before signing, review exactly what the builder has included in the price and what circumstances could result in additional costs.
What Is a Cost-Plus Construction Contract?
With a cost-plus contract, the homeowner generally pays the actual costs associated with constructing the home, such as materials and labor, plus an agreed-upon builder fee or percentage.
Because the final construction costs aren't necessarily known when the contract is signed, the homeowner may have more exposure to increases in material, labor, or other project expenses.
That doesn't automatically make a cost-plus contract good or bad. It simply means it's especially important to understand how costs will be documented, how the builder's fee is calculated, how changes are approved, and whether there are any limits or safeguards built into the agreement.
Fixed-Price vs. Cost-Plus: Which Is Better?
There isn't one contract structure that's right for every custom-home project.
A fixed-price arrangement may provide more predictability when the scope and specifications are clearly defined, while a cost-plus arrangement may offer flexibility during a highly customized build.
The most important thing is understanding where the financial risk falls if costs change.
Before signing any construction agreement, ask your builder to explain:
What is included in the base price?
What is specifically excluded?
Which items have allowances?
What happens if an allowance is exceeded?
How are change orders handled?
Who is responsible for unexpected cost increases?
How are material or labor price changes handled?
What happens if construction takes longer than expected?
For questions about the legal terms or obligations contained in a construction contract, consider having the agreement reviewed by a qualified attorney.
3 Ways to Protect Your Budget When Building a Custom Home
1. Review Your Plans and Specifications Line by Line
Don't focus only on the total price.
Ask your builder for detailed plans, specifications, allowances, and information showing what is included in the proposed construction budget.
If you're comparing multiple builders, try to make an apples-to-apples comparison.
One builder's price may appear lower simply because fewer items, lower allowances, or different specifications are included.
Your construction plans, specifications, contract, and budget should work together to clearly describe the home you expect to build.
2. Pay Close Attention to Allowances
An allowance is an amount included in the construction budget for an item whose final selection or cost may not yet be known.
You may see allowances for things such as:
Flooring
Lighting
Plumbing fixtures
Appliances
Countertops
Tile
Cabinetry
Landscaping
Make sure those allowances realistically match the level of finishes you're expecting.
For example, if you're planning a luxury appliance package but the budget includes an allowance for entry-level appliances, you could face a significant out-of-pocket difference later.
Ask:
“Is this allowance realistic for the selections I have in mind?”
That one question can potentially prevent an unpleasant surprise during construction.
3. Research Your Builder
Building a custom home requires a tremendous amount of trust.
Before choosing a builder, look beyond the model homes and beautiful photographs.
Ask about:
Experience building homes similar to yours
References from previous clients
Communication during construction
How change orders are handled
How budget overruns are communicated
Typical construction timelines
Warranty procedures
Experience working with construction lenders
Talk to previous clients when possible and ask about their experience—not just with the finished home, but throughout the entire construction process.
How Does Construction Financing Help Protect the Project?
Your construction lender plays an important role during the building process.
Depending on the loan program and project, construction financing may involve a draw process, where funds are released throughout construction rather than providing the entire construction budget to the builder upfront.
At TLP Mortgage, our construction lending process may include measures such as property inspections before certain construction draws are released, borrower authorization of draw requests, and insurance requirements designed to help protect the project.
The exact process and requirements depend on the construction loan program and individual project.
Your lender isn't a substitute for carefully reviewing your builder agreement, but an experienced construction lending team can help you understand how the financing side of the build works and what to expect throughout the process.
Can I Finance Land and Construction Together?
Depending on your situation and the loan program, you may have several options for financing a custom home.
That could include purchasing land and financing construction, building on land you already own, or potentially using existing land equity as part of the financing structure.
TLP Mortgage offers construction financing options for qualified borrowers throughout Texas, including Build on Your Lot, one-time close, and two-time close construction financing options.
Because every property, borrower, builder, and project is different, it's helpful to discuss financing before finalizing your construction contract.
Frequently Asked Questions About Building a Custom Home
Can the price of my custom home increase during construction?
It can. Change orders, selections above budgeted allowances, unforeseen conditions, contract provisions, and other factors can affect the final construction cost. Review your contract carefully to understand which costs could change.
What is an allowance in a construction contract?
An allowance is a budgeted amount for a particular component of the home when the exact item or final price hasn't yet been determined. If your final selection costs more than the allowance, you may be responsible for the difference.
Should I talk to a construction lender before choosing a builder?
It can be beneficial. Speaking with a construction lender early can help you understand your potential financing options, budget, loan process, and lender requirements before you finalize plans with a builder.
Can I build a home on land I already own?
Potentially, yes. Construction financing can be available for borrowers who already own their lot, and depending on the loan structure and qualifications, existing land equity may play a role in the transaction.
What is a construction loan draw?
A construction draw is a release of a portion of the construction loan funds as work progresses. Draw procedures and requirements vary depending on the lender, loan program, builder, and project.
Start With the Right Team
Building a custom home is different from purchasing an existing house. You're coordinating financing, land, plans, a builder, construction timelines, inspections, draws, selections, and ultimately your permanent mortgage.
Having experienced professionals around you can make the process much easier to understand.
At TLP Mortgage, construction lending is one of our areas of focus. Our team has experience helping Texas borrowers navigate custom-home financing, including building on land they already own.
We believe financial empowerment begins with knowledge. That's why we want our clients to understand not only how they can finance their custom home, but how the construction lending process works from beginning to end.
If you're considering building a custom home in San Antonio, the Texas Hill Country, or elsewhere in Texas, connect with TLP Mortgage early in the process. We'll help you explore your construction financing options and understand what to expect before the first shovel hits the ground.
Loan programs, guidelines, terms, and eligibility requirements are subject to change and borrower qualification. Construction contracts vary. TLP Mortgage does not provide legal advice; borrowers should consult an appropriate legal professional regarding contract terms.
