Top 8 Custom Home Pricing Questions

We are often asked questions about pricing in our industry.  So we thought it might be helpful to arrange a list of frequently asked questions (FAQ’s) about pricing in the custom home industry. These are our top 8 custom home pricing questions.

Q. Do you send every plan out for bids from the trades before you provide a cost estimate on a custom home?

Answer:  No. There are several reasons for this. The primary reason is that residential estimating, unlike commercial, has too many variables. Commercial construction can be specified in a fairly precise manner. Residential cannot, at least not high-end residential. High-end residential consists of hundreds of different products and product variations which can go into the home, each resulting in a different labor and material cost. In commercial construction, the contractor would typically select the least expensive option in order to keep his estimate competitive. In custom home building, it would be a very bad idea to select the least expensive option since most clients would not be happy with those options.

Q: So, how can you be so detailed and precise in your estimate to the client (over 300 line items)?

Answer: We select the products that provide the best cost/benefit to the client and then use our extensive cost database to price each item. 

Q: Do you know the cost of every option?

Answer: Almost, but no. We do have to make a phone call every now and then to get pricing. There are always new products on the market, and we have to research the brand new ones.  

Q: Why are there so many different options and variables in residential construction?

Answer: Primarily because clients in the high end are willing to consider the cost-benefit of better products. When price is all that matters, the less expensive option will always be chosen. However, high-end clients are willing to consider the ongoing maintenance costs of the home, energy costs, and what we call “lifestyle upgrades” such as whole house automation.

Q: If there is so much variation in the pricing, how can bids be compared from one builder to the next?

Answer: It’s tough. The best way is to ask for as much detail as you can possibly get. Then, ask more questions about the products chosen and methodologies being employed for each discipline. For example, where concrete is concerned, ask about the type of slab (slab on grade or post tension, for example), PSI of the concrete being used, soil testing, engineering of the slab (how much rebar, etc,) and keep asking questions until you feel confident in the answers you are getting. At some point, you should get a feeling for who is being the most honest and forthright.  That’s who you want as your builder.

Q: If I find a builder who has less experience and has forgotten to price everything in, haven’t I just found a bargain?

Answer: You would think so, but the answer is a resounding no.  The reason is simple.  An inexperienced builder will leave things out, ask you for more money throughout the project, and make lots of mistakes that could end up costing you more later.  If you don’t agree, read about the Sandra Bullock lawsuit against her home builder in Austin. She sued her builder and actually won. Many others who aren’t able to sue or who didn’t win have similar stories to tell. Building a home is complex. If done properly, it will be a huge blessing for many years to come. If not, it will be a very expensive headache. It’s as simple as that.

Q: Is there a big profit margin in the custom home industry?

Answer: No, and this is probably the area of the most confusion. People think about retail markets such as jewelry where markups can be 50% – 100% and assume our market is similar. Unfortunately for us, the margins are paper thin in the custom home industry. For instance, the common cost plus markup in our area is cost plus 18%. In this industry we deal with REALLY BIG numbers and take REALLY BIG risks and have little bitty margins. That’s just the nature of the business and the reason why the big difference in cost between builders is THEIR cost, not typically a much bigger mark-up.

Q: Why is there so much variation in a cost from builder to builder? Don’t they all just build a house; so wouldn’t the costs be pretty much the same from one builder to the next?

Answer: No, it’s actually not the same house from one builder to the next that is being bid.  This is because of the many variations in products that can go into the home. This goes back to the answer in #1. Also, there is a difference in labor costs, sometimes rather significant.  More skilled labor demands a higher price.  That’s another area where an experienced builder can really save you money. Good relationships with trade partners yield the best skilled labor at the best prices.

What are your questions? If these questions have led you to more questions, bring them on. I will be glad to do my best to answer them.

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