Before signing contract for new home construction ask builder what type of payment schedule they work with and ask for samples.
It is important to know how the payment works, when you need to pay and how much will it be. Never settle for large deposits and down payments for construction as it puts you in high risk. Whatever the payment system is, checks should come progressively with completion of certain steps of the job.
You will find very strict home builders that have system in place with exact number of payments, similar deposit for all jobs and specific instructions. These would be lot home builders and subdivisions that make similar homes with slight changes in design.
Custom home builders are much more flexible. First of all they have several payment systems to use (cost plus, builder fee contract and fixed construction price) and discussable number to use in contract. It can be as little as 3 large payments or as many as 20 smaller checks throughout the job.
Ask financial advisor if their schedule of releasing funds matches the mandatory payment of builder company or if they could work with such structure.
Example of Progressive Payment Schedule
Our team is providing an example of progressive payment that is very popular in home construction industry. Assuming the house construction is $500,000 and additional $30,000 is the cost of architectural drawings, city permits and preparation.
The first check of $30,000 is paid way before construction starts. On average the time way from initial payment to breaking the ground in custom home construction project; clients patiently wait 3-4 month.
In our example the agreement between builder and client was to split cost of project into 10 payments. This breakdown works only for fixed price contract. Follow the post and read below how other payment systems are different.
Example of House Construction Payment Schedule
1) Initiating design and creating drawings (10%) $30,000 Balance: $500,000
2) 10 days prior to start of the project: (10%) $$50,000 Balance: $450,000
3) On Completion of: (10%) $50,000 Balance: $400,000
– Construction Set up – Demolition of roof – Full gut of existing house – Disposal of debris
4) On Completion of: (10%) $50,000 Balance: $350,000
– Underground drain – Waterproofing/weeping tile – Concrete Slab – New footings where required
5) On Completion of: (10%) $50,000 Balance: $300,000
– Framing – Temp Stairs – Roofing Trusses – Exterior vapor – Roof Installation
6) On Completion of: (10%) $50,000 Balance: $250,000
– Exterior finish/Stucco – New Windows – Exterior doors ordered – Eaves and gutters
7) On Completion of: (15%) $75,000 Balance: $175,000
– Plumbing Pipes – Insulation of Walls and Attic – Electrical Work – HVAC System and Ducts
8) On Completion of: (15%) $75,000 Balance: $100,000
– Flooring – Tiling – New Stairs – Priming walls – Drywall/mud/tape
9) On Completion of: (15%) $75,000 Balance: $25,000
– Kitchen – Vanities – Countertop – Backsplash – Interior doors
10) On Completion of: (5%) $25,000 Balance: $0
– Lights – Installing shower doors – Installing Faucets – Painting – Cleaning
Types of Payment Systems with Suggested Schedules
Home construction is different from smaller renovation jobs. For the most, custom home builder is a management company that hires trades and supervises the job on behalf of client. Estimating all the costs and making sure prices don’t go up for a year ahead (time of construction) is hard or even impossible.
Therefore home builders tend to lean towards safety in contract, asking for builder fee or cost plus agreement. There are three known systems of payment to home construction company:
- Cost Plus Agreement
- Builder Fee Contract
- Fixed Price
The amount and contract agreement details are completely different in each structure. Make sure to understand how all of them work before signing away hundreds of thousands of dollars. The last thing home owners or as builder call them clients want to do is constantly worry about contract details and reading them over and over again as the job progresses.
Home Construction Payment Schedule by System
Let’s break down each system and see which one you prefer for such a large project. Talk to builder and ask if they are willing to work with house construction payment schedule and system that you like. If they stick to only one structure, make sure to completely understand it and know all ins and outs.
Cost Plus Agreement – Most preferred payment structure by home builders. It is safest strategy that involves no risk from construction company.
The fees for management is a percentage they agree with client. It is based on size of a house and complexity of work. On average home project, builders want to make 15% but can go as low as 5% – 7% if overall cost of construction is higher than 5 million dollars.
The system is very easy to understand and implement. Company manages all trades, schedule and supervision of the job for compensation on top of all costs. For example in first stages the house is excavated, foundation poured, framed entire house, windows and roof installed. Assume all of these expenses were combined to $200.000, so builder gets check to cover all costs and additional $30.000 (15%) for their services.
Builder sources out best know subcontractors and shows all expenses for material to client. There are two options of house construction payment schedule in this scenario. Either pays all bill right away as they come from suppliers and contractors or builder is granted specific amounts of money with confirmation of client until there is not money left and another balance is added.
Builder Fee Contract – This system is almost identical to cost plus agreement, but instead of percentage based fee it is agreed to be flat and never change. Before contract is made all budgets are discussed as well as size of the house with necessary details. Builder and client agree for set $100.000 fee plus all the costs of labor and material to hire for construction.
Once again builder acts as a management of third party contractors that are hired to perform specific tasks. Company does not invest their own money and has limited risk.
Clients may prefer this house construction payment over cost plus agreement because of simplicity and transparency. In cost plus, estimates may be inflated for builder to have larger pay with agreed percentage and in flat fee it cannot happen.
Downside for both parties in this contract payment is when project changes. We recommend adding a clause of increase or decrease builder fee if size of the house or level of complexity changes after agreement is signed.
Fixed Price – Probably the best option for client in terms of assurance. Both parties agree on exact construction or presented drawing for the house and exact fixed price is set. Just like in our example above with $500.000 hard cost construction and $30.000 design package is agreed to be paid in 10 payments.
Any amount of payments can be agreed in fixed price terms as long as this amount covers progress of work with related expenses. If client wants to make only 5 total payment, deposit has to be larger and completion steps include more of finished work.
Custom home builders absolutely hate fixed price contracts, but eventually have no other choice if there are no other options. It involves complete calculation of entire house construction before it even starts and high risks with cost increase.
Imagine if builder calculated everything properly and even added 15% of profit in fixed price, but during COVID all material and labor cost increased by 20% within the year. For this specific project builder would lose their own money instead of making for home construction job.
