The Custom Home Process
A Step-by-Step Guide & Overview of the Custom Home Building Process
To the uninitiated the process of building a custom home can be a daunting and mysterious process. Most people venturing into the acquisition of a new home are embarking on the largest personal financial commitment that they have made to date. All of this added together can give people reasonable cause to want to understand what they are getting into before they commit themselves. The average home in our area has over 40,000 individual parts, involves the skills of between 85 and 120 suppliers and subcontractors, and demands over 3,000 on site worker hours to make the dream a reality. “The construction business is a very complex choreography of a zillion very simple tasks.” With this in mind the best way to understand the process is to break it down into its individual parts. We look at the construction process as being made up of 10 main elements that are tied together in various ways. These elements are as follows:
- The Custom Home Process
- Land Development
- Home Plans
- Specifications/Selections (“The Shiny Stuff”)
- Team Members/Designer
- Subcontractors and Suppliers
- Decorator/Interior designer
- Change Orders
- Contract Formats
- Fixed Fee
- Cost Plus
Hopefully this will give you an overview and cultivate additional questions you have about the process.
The budget drives everything and everyone has a budget. The budget may be dictated by the bank or by your personal comfort level. Another item, which can affect your budget, is the reasonable fair market value for the home you are contemplating. Be prepared to discuss your budget constraints frankly with your designer and builder early on so that the guidelines for the rest of the process can be established. I hope that when you finish this review that you will understand that this exercise is for naught if the team does not have a budget guideline to go by. You should establish a budget ceiling and then use your professional team to find out how much lot and home you can fit in to those limits. Some homebuyers try to be coy and not reveal their budget. Their only concern is to know how much per square foot a builder charges for the homes that he builds. To this I would suggest an alternate scenario to consider. Picture a custom builder as if he were an automobile manufacturer who builds everything from a bottom line Chevy to a top of the line Mercedes. A true custom homebuilder should have the ability to build this range of size and quality. Would you ask a “custom” automobile manufacturer how much they charge per pound for a car? Probably not. The question would be nearly impossible to answer. The actual price for the car (price per pound) depends on what is included in the car and its relative quality. The same is true for a home.
The budget is composed of 5 basic elements – Land, Land Development, Home Plans, Specifications, and Financing.
The land is the single largest line item in any construction budget. In our area it usually ends up being somewhere between 1/2 and 1/4 of the overall price of the home. If this line item is handled incorrectly, then the remaining elements of the budget will be seriously impacted. The single biggest mistake that customers make is to go out and purchase a lot without considering the other elements of the budget. If a person pays too much for the lot in relationship to the rest of the budget or if they pick an apparently cheap lot that has large land development costs, there may not be enough money remaining in the budget to meet the minimum standards for the home that were envisioned. This is not an anomaly and happens far too often when people purchase property without consulting a construction professional to put together the entire budget first. It is our recommendation that a customer meet with a design and building professional (or even better a design/builder like Century Custom Homes) before embarking on a land search. You need to put together a budget concept to see approximately what the home and required finishing will cost so that it can be determined what is left in the budget to purchase the property. At Century Custom Homes, we encourage customers to have us walk their potential lot(s) so that we can give an evaluation of how the lot and its price might fit into their overall budget and construction plan.
Land Development is probably the least understood area of the entire process. It is not only misunderstood by the clients but also by large number of builders. For this reason, many builders will try to make the land development an allowance item, because they do not know how to calculate what the land development costs will be. At Century Custom Homes, we give you a fixed price. Builders define land development differently, but in our company we find the following explanation the easiest for everyone to understand:
If you can imagine placing a hook on top of the home and picking it up from the lot – all the work that remains on the site with the home removed is “land development.” This includes excavation, clearing trees, septic fields, sewer, water, bringing in and connecting utilities, driveway, driveway piers, landscaping (lawn, seeding, bushes and trees), engineering, and permits. On a typical This could easily be the second largest line item in the overall budget right behind the cost of the lot. We feel that it is unconscionable for a builder to ask an owner to go into the custom home process without having a very good idea as to what the overall land development costs are going to be.
Home plans can be obtained in many different ways. You can engage an architect or a design/builder to create your plans. Either one can make modifications on some existing plans that they own or start with a blank piece of paper and create a totally unique design. Plans can also be obtained from plan books that are available in most bookstores. Plans can also be created by combining many different ideas from many different sources into a unique plan that fits your needs. Many times the custom home plan process is actually a combination of the above. The home design process should not start until an overall budget review has been agreed upon between the owner and the design team. Before the first pencil meets paper, the designer and owner must come to a general agreement as to what the overall size of the home should be, the general specifications and what the overall budget is for the structure and finishing items. National statistics indicate that if this policy is not followed then the money and time put into the design process probably will not end up in a home being built. Over 50% of the people that come to my office that have already purchased their lot and have a completed set of plans end up never building their dream home, because the overall cost for the plan vastly exceeds their budget. We have many customers that have invested between $10,000 and $150,000 and up to two years of their time putting a set of plans together only to find out from us in one-half hour that they are so far over their budget that the plans have to be thrown away. Unfortunately this happens all too often, but with the aide of an experienced design team, you can guard against doing this.
Perhaps, the most infectious disease in the custom home process is the “while you’re at it” syndrome. Every one is guilty of this including architects, builders, and homeowners. The syndrome works like this… “While you are at it,” let’s add a 4th garage, because that would be really nice. “While you are it,” let’s put in 2 dishwashers and 2 refrigerators. “While you are it,” let’s make the library 10′ bigger in each direction. etc, etc.
We find that this area is where the architects and the design/builders are really separated. Unfortunately, there are some architects who do not have the discipline to say no to a budget busting idea, and/or the owners will not listen to them. The project that starts at 4,000 sq. ft. ends up being 5,500 sq. ft., and everyone is amazed when they consult a builder and find out that they are decidedly over budget. I should point out that architects generally make their living by drawing and not building. A design/builder, however, realizes that their income is based on actually building the home so it is in the design/builder (as well as the owners) best interests to make sure that the entire design process ends up with a plan and specifications that falls within the owners budget. Trust me – you don’t want to put your heart and soul in to spending many thousands of dollars and many months of time designing your dream home only to find out that it will never be built. If you want to use an architect, put a clause in their contract that if the home design does not come in near the agreed upon budget, then they will not get paid. The construction process, like life itself, is a series of compromises. Those compromises should be made at the beginning of the design and specification process and not as an after thought when the wish list has been finalized and the plans are complete. Cost surprises at the end of the design process are not fun.
Specifications/Selections (“The Shiny Stuff”)
Many of the technical selection items, such as what kind of lumber to use, how the drywall will be glued and screwed, etc, that are necessary to put the home together can be made by your building contractor or designer. Most homeowners are not knowledgeable enough to make these decisions, so it is wise to pick an experienced and trustworthy builder. He can advise you in this area and explain to you the relative quality of the various ways to put a home together and its associated costs. The fun part of the selection process is what we call the “shiny stuff.” That includes the plumbing fixtures, light fixtures, cabinets, counter tops and so forth. Some of this stuff is not shiny (like carpet), but we still call it the “shiny stuff” any way. Once again, if the budget has been carefully monitored up to the point of making the selections, then there should be enough money left in the budget to put the finishing touches on the home that were envisioned.
An improperly handled budget, where the cost of the lot is too high; the land development costs were unknown until it was too late; and the home design has grown larger than the budget can handle, the selection and finishing items will suffer. This does not have to happen if the whole budget process is carefully evaluated at the beginning so that enough money is set aside to do the nice light fixtures, marble, appliances, cabinets, etc., that transform a house into the dream home that you have envisioned.
There are two stages in specifications — the budget stage and the final stage. Everyone has heard about budget overruns in the finishing areas. This sometimes leads to an ill-advised process of the owner trying to pick every knob and light bulb before the construction process starts. I can tell you that in 26 years of business we have not had had a single customer who has been able to do this without going back and completely revisiting all of their selections and putting themselves through the process two and three times. We believe the correct way to handle the specification process is as follows:
The designer/builder can block out the various finishing areas and you can address those one by one. A reasonable quantity, quality, and price needs to be allotted to each of the areas to make sure you preserve enough money in the budget so that when you come to the finishing you can put into your home the “shiny stuff” you had envisioned. You can help this stage by creating a simple file with ideas taken from your previous home, magazines, visits to stores, etc.. File the photos by category (kitchen, plumbing, trim, etc.) Do not wear yourself out by trying to make your final decisions at the budget stage of construction. You will burn yourself out and will change your mind multiple times as you see the home being built. We help our clients to get a reasonable “education” on each of the finishing areas so that they can and then agree with the designer/builder as to how much needs to be allotted for each particular area. For instance, in the area of appliances, the thousands of appliances available can confuse any purchaser. In our initial budget process, we would have a 15-minute discussion as to what level of quality of appliances you think you are looking for and then we offer suggestions that fit into that category. We will suggest a refrigerator, dishwasher, disposal, oven, cook top, etc. which should meet the level of quality that you have stated you want. We will then put prices on each of these appliances for you and show you a total that we will suggest be included as a line item (allowance) in the budget to cover appliances. We sometimes recommend bumping the allowance 10% to 15% to allow for some latitude in the selection to allow for upgrading should you decide to do this later.
Once the entire budget is put together, you can revisit each of the selection areas in a casual and informed fashion to refine the selection in plenty of time so that the product can be ordered and delivered within the construction schedule. We have our customers start the selection process early, so that once they are done the owner can go back and make trade offs from one selection category to another to come up with a final specification that meets their needs at the agreed upon budget. Our goal at Century Custom Homes is to have the allowance trade offs “revenue neutral” at the end of the job, so that the owner does not run over the agreed upon budget. It is infrequent that any of our clients run over more than 3% to 5%. The overruns, when they come, are generally caused by the client completely changing their mind as to the level of finishing that was originally agreed upon. Many customers are concerned about being penalized for making changes as the process proceeds. If you selected a good, quality, true custom builder as your contractor, there should be no monetary penalty for you to change your mind during the selection process. At Century Custom Homes, you can change your mind on the refrigerator as often as you want, up to the date that we actually place the order. We are, after all, a custom builder and custom means unrestricted choices.
Financing is the last item in the budget process, but should be thought of first. Many times the amount the bank will finance drives the overall budget. In most cases, the finance part of the overall project is a small percentage of the cost and is really not a very big line item in the overall budget. With the cooperation of the builder, the owner will obtain the loan to acquire the building lot, build the home and provide for permanent financing once the home is complete. This is typically referred to as a “land acquisition/construction/permanent loan.” This is a very specialized area of financing and we strongly recommend that you interview lenders that specialize in this area of financing. We have witnessed unnecessary delays and expense stories when clients went to their everyday bank for financing and end up having their construction delayed 6 months or more, because the bank was not familiar with this type of special financing. We can provide you with a list of good lending institutions that will treat you fairly and will gladly have an initial no-obligation meeting with you to further explain the process. They can also quickly give you an idea as to how much they will finance and what the costs to you will be.
The next area to review is the Construction Team and their duties. As you can see the team is composed of the Owner, Designer, Builder, and eventually the Subcontractors and the Suppliers.
The owner is the most important part of the Team and their duties should be intuitively obvious. These duties include communicating to the designer/builder of what they are envisioning in their new home and how much they are willing to spend. Duties also include making selections on a timely basis, funding the project, and cooperating with the rest of the team during the process.
The Designer has the obligation of putting the dreams of the customer (not those of the designer) on paper in a professional manner so that it can be understood by the other professionals that will be charged with actually building the home — all within the agreed upon budget and in a reasonable time frame. From “scratch” plans can easily run $20,000 – $40,000 with an architect. A design/builder can modify an existing set of plans for little or no charge.
Before your decide on your designer, find out if they use a Computer Aided Design program (CAD). This can greatly accelerate the design process (and lower cost) as well as making changes easy — It is a custom home isn’t it? Also, find out who actually does the design.
The builder should have the total responsibility for the selection of the subcontractors and suppliers, who will work for the builder to meet the client’s goal. The builder should also work with the client as early as possible and establishing the budget that will guide the entire process. The builder should also work with the owner in the selection process to make sure the items chosen are within budget and on site on when the tradesmen need them to keep the flow of the project moving.
Subcontractors and Suppliers
Subcontractors and suppliers should also be a part of the Builder’s Construction Team and not someone that happens to be “low bid” on your home. Many times these trades are looked at as subordinate to the overall process and this attitude can lead to lack of cooperation, an unstable schedule, and poor quality. At Century Custom Homes, we have selected some of the finest tradesman in the Phoenix area and use them exclusively for each of our operations. For instance, we have chosen the best drywall contractor available and we have negotiated a fair price for each sheet of drywall to be installed according to our schedule in a workmanship like manner that will meet our high standard of finishing. We know we can have drywall installed cheaper, but we also know that we cannot get the same quality if we “low bid” each job, hop from subcontractor to subcontractor, and try to deny the drywall man a reasonable profit for the high quality work we expect of him. By making the subcontractors and suppliers a part of the Team, we are able to get the best prices for top quality work and keep the jobs on schedule. Our electrical contractor has been with us for over 20 years and he knows what we expect and knows he will be treaded fairly and will always paid on time. He gets all of our work and in return he gives us great prices, top quality work, and always finishes on time. When the heating man, electrician, plumber, etc. work side by side year after year, a camaraderie is created on our jobs that leads to a pleasant job site that ends up reflecting positively on the quality of the final product.
Not many of our clients engage these types of professionals, because we provide a lot of this through the services in-house. A decorator or interior designer can be helpful in making selections and in helping define the “look” you want the home to have. As with an architect, you have to make absolutely certain that they understand your budget parameters and the importance of making selections on time. It is important to remember that they are assistants in the process and that you and you alone, have the ultimate responsibility of making sure that your selections are made on time. We would encourage you to spend as much time researching your interior designer as you would your builder. You want to make sure that you select a professional who has experience with new construction, and understands the importance of a budget and a schedule.
Every job has a schedule. Even if a customer says they are not in a rush, we eventually find that they do in fact have a schedule when they evaluate the cost of money and how it effects a job that drags on forever. How long a home will take to build depends on the difficulty of the land development, the complexity of the structure of the home, its size, and the level of finishing that will go into the final home. The schedule is also driven by the owners cooperation in making selections in a timely fashion so that the products can be on site when needed for installation. As a rule of thumb, on a reasonable lot with a reasonable design you should figure a minimum of 6 months to finish a custom home that is at or under 4,000 finished square feet on the top 2 floors. For every thousand square feet of finished square feet above 4,000 finished square feet, you should add about a month to the construction schedule. So, a 6,000 finished square foot home should take about 8 months. The schedule should be specifically addressed in the contract, as well as and the duties of the owner, contractor and other Team players so that a schedule can be established and adhered to by all parties. At Century Custom Homes, we include a start and finish schedule with our contract and if your selections are on time, we will not deliver the home late. (Check our references). We also include a selection schedule in our contract so you know up front when your decisions will be needed.
Many customers are not aware of what is in the warranty they are getting until the end of the project. We think that it is irresponsible for any builder not to discuss the warranty at the initial stages of negotiations and to include the warranty in the contract documents. A warranty, however, is only a piece of paper and is only as good as the builder who is behind it. Many of the warranty heartaches that we hear about in the industry are the direct function of the owner choosing an inexperienced contractor who has a poor track record of building a true quality home and an even worse track record of honoring their commitments to fix the legitimate complaints of their customers. In choosing your contractor, you should focus carefully on the builders reputation of honoring their commitments to the owners once they have been paid and the owners have occupied the home.
Change Orders are unfortunately looked on by many as the “dirty words” of the construction business. This should not be the case. A true custom builder should be willing to customize the home as the building progresses. At Century Custom Homes, we are willing to make any changes or modifications at the initial stages of the design or any time during the construction process as long as we are reasonably compensated for our efforts. If we can move a closet from one side of a bedroom to the other with a pencil (on the plans) before it is built then there is little or no charge for this service. If, however, we have to move the closet from one side of the bedroom to another with a sledge hammer after it as been framed, drywalled and painted, then there will be a charge commensurate with the amount effort the workman have to expend and how the change delays the project. As a result of the step-by-step process we use to guide our clients, tearing things out is a rare occurrence at Century Custom Homes. We pride ourselves in educating our customers in the whole process as we proceed so that they can make sound decisions in a timely fashion so that everything goes in right the first time. The change order process and the associated costs should be clearly defined in the contract with unit prices agreed upon up front so that there will not be any disagreements between the parties when a change order occurs. Most of our change orders are revenue neutral. When a customer makes selection decisions or changes such as shifting from Sub Zero Refrigerator to one that costs essentially the same, a customer should not be penalized for this kind of change as long as it is made early enough prior to the orders being placed.
The contract documents serve as the road map for the construction process once the budget is agreed upon and the design is complete. A competent custom home builder who has been in business for a period of time should be able to provide you with a fair contract that will accurately direct the course of events throughout the construction process. You should expect the contract to be one sided in favor of the builder. This is because, the owner is usually a neophyte at this process, but the builder should be an expert in the home building trade. The builder should be in charge and held responsible for all the operations that occur in the construction of the home. We at Century Custom Homes pride ourselves in having a contract that we have refined over the last 23 years that is clear, concise, and fair to all parties. Once we finalize our contract with you we encourage you to take it to your attorney and get their opinion. In many cases, our customers’ attorneys advise their clients that if we are as professional in our construction as we are in our contract presentation then they have made the right decision in a contractor. When you come to us, do not ask for our “boiler plate” contract, because we do not have one. We have a multiple selection contract basis which is customized for each owner and which is driven by their lot, the type of home and the finishing.
Construction contracts take several forms, but these 3 are the most popular.
Most custom home contracts are referred to as “turnkey”. In this contract format, the owner and builder agree what will be in the home and the contractor gives a fixed price to complete the work in the contract documents.
This is another contract format where a detailed fixed dollar amount is agreed upon that the contractor will receive for his work. This is not generally used because the fixed fee will change if the owner changes the scope of the work. A fixed fee also generally means that the owner is responsible for whatever the cost of job ends up being which can be dangerous without a budget guarantee from the contractor.
There are several forms of cost plus contracts. The cost plus contract that results in the owner paying all the costs plus a mark-up to the contractor is the best scenario for a builder but the worst for the client. At Century Custom Homes, we have a problem with a contract format that allows the contractor to make more money as the job budget runs out of control. We can, however, do an amended form of the cost plus contract by attaching a “not to exceed” stipulation. In this format, we bid all the work in an open book format and supply a very detailed line item budget that is attached as part of the contract. The Contractor then is given an agreed upon percentage mark-up for all money spent but is responsible to see to it that the job comes in at the agreed upon budget. There is an overage allowance included in the budget to cover unforeseen circumstances. In our format, we then agree that if for some unforeseen reason the overall price goes past the budget amount plus the overage buffer then the contractor and owner split the overage 50/50. This goes back to our Team concept where everyone pitches together to the common goal of completing the home on time and on budget.
Hopefully this outline has made you more comfortable with the overall custom home process. I will repeat what I said initially in that there is no way the entire process can be explained to the uninitiated in this short space and time. Your best key to a successful custom home process is to do your homework and check references extensively so you choose a good, competent, experienced custom homebuilder to guarantee your dreams will become a reality in a cost effective, timely and enjoyable fashion.
- Finished Lot Cost
- Land Development
- Home Plans
- Finished Home Cost
The chart is somewhat deceiving because it is really backwards from the way the process should operate. We see the budget at the end of the chart, when actually it should be at the beginning. The entire process and each element of the process are budget driven. The building team cannot loose site of this relationship at any time during the process.