There is a lot of information in the payment records, in the estimates, and in the builder’s activities before the start of the work that will tell the owner how well a project will be run. Most owners select a builder by comparing the prices of three or four proposals, calling a few references, and selecting the easiest builder to talk to.
You can also test a builder out before agreeing to a contract for a project. If you feel they would do a good job on your project, you can draw up a contract that includes the terms and conditions of your project based on the evidence you have gathered about them.
Test financial stability before anything else
Unless fully funded, a builder will slow up your job to conserve cash for the ‘draw’ dates, and a review of his bank references and bonding capacity will indicate whether he has sufficient funds to meet the draw dates. His surety has already analyzed the project for the owner’s due diligence.
Understanding supplier relationships with owners such as yourself is also an important factor to consider. In regions such as Cleveland, Akron, and the surrounding custom home builders Cleveland Akron market, payment history is widely known and discussed on a weekly basis among various suppliers. Contacting the local lumberyard and speaking with the credit manager will also yield valuable insight into a builder’s payment history. Additionally, speaking with mechanical subcontractors will give you even greater insight as to how the various builders treat their suppliers and the associated payment history.
Records worth pulling
- Mechanic’s lien filings against the builder’s past projects over the last five years, available through county records
- Civil litigation history, separating warranty disputes from payment disputes, since the two indicate different problems
- Current license and insurance certificates, with general liability limits checked against your project value rather than assumed adequate
- Workers’ compensation coverage confirmed directly with the carrier, not by reviewing a certificate the builder supplied
Read the estimate as a document about risk
The structure of a proposal is also variable. Some home builders charge more for their proposals than others. Often the owner’s funds will get spent in the allowances for things like tile, lighting, plumbing fixtures and appliances for custom homes. Often these items are “allowances” in the proposal that are really structured to allow for growth and more money is spent from the owner’s funds for these items as the project progresses. So verify what specific products are included in the builder’s allowances for things like tile, lighting, plumbing fixtures and appliances for your custom home. Verify whether or not these products are currently available.
Well prepared estimates outline the various Subcontractors required to complete a particular home, separate out the costs of the labor and materials and list out the General Conditions of the contract (such as the cost of insurance, tools, etc.). It is surprising how many people misunderstand the costs of site work on untested lots, which can end up costing a fortune to put right.
Comparing contract structures
| Structure | Who carries cost overrun | Best suited to | Main weakness |
| Fixed price | Builder | Complete drawings and finalized selections | Contingency is hidden and unspent margin is not returned |
| Cost plus fee | Owner | Complex renovations and unknown site conditions | Little incentive to control spending without strong oversight |
| Cost plus with guaranteed maximum | Shared above the cap | Custom work with evolving design | Requires open books and disciplined accounting |
Judge design capability during preconstruction
Front-end pre-construction work (estimating, value engineering, etc.) to develop a construction plan for a house to be built is a true measure of a builder’s competence to complete homes well and in a timely manner. The amount of time a builder spends planning the construction of a home before breaking ground is a true indicator of competence, which is why owners in northeast Ohio are usually better served by seasoned Cleveland Akron custom home builders who price and sequence the entire job before the first excavator arrives.
Ask the builder for examples of difficult design conditions (e.g., roof intersections, walkout basements on sloped sites, etc.) and then test their ability to design and handle these situations on the spot. This will give you an idea of whether they can actually handle these types of situations in the field.
Signals of a serious preconstruction process
- A written selections schedule with decision deadlines tied to the construction sequence
- Energy modeling or at least a defined envelope strategy, including air sealing targets and mechanical sizing logic
- A subcontractor bid record you can review, showing three prices per major trade
- A schedule built from durations rather than a single completion date
Inspect the work that will be covered up
Finished homes are usually just being marketed by the builder. You can easily tell if there are going to be problems with a home under construction by inspecting it in the framing or rough-in stage. Look at how penetrations are sealed and whether there is blocking for future items (such as heating vents). Also, look at how the mechanicals are organized and whether the site is clean.
Third-party verification
For the pre-drywall inspection and the final inspection of the finished home, retain the services of an independent inspector and include their requirements in the contract. Most builders either resist independent inspection of their work or appreciate having their own quality checklists that they would be happy to provide to you.
Write the terms that govern the hard moments
The terms and conditions of the agreement with the builder can be negotiated to translate all of the hard work into meaningful protection of the owner’s interests. Change orders should be written and priced prior to work commencement with a markup on change orders. Owner interests are best protected by having draws tied to completion of milestones and verified prior to release rather than based on a calendar date. A builder should be willing to provide a warranty period and respond to owner’s calls within a specified time frame. The builder should identify who will enforce the warranties of the various subcontractors who completed work on the owner’s project and then went on to other projects.
Set out the process to be followed in the event of a dispute and include mediation. Ensure that all subcontractors and suppliers are required to provide lien waivers for all payments made under the Contract. These items cost nothing to include in the Contract and will only be relevant at the end of the project if things have not gone well.
