Some builders offer "cost plus" pricing, where you pay the actual costs of all materials and labor which go into the house, plus you pay the builder his profit which is a percentage (say, 10%) of the total cost.
On a fixed price contract, a builder has to set a higher price to allow for possible increases in the cost of building materials. If prices do not go up, then the builder has simply gotten more profit in exchange for assuming that risk.
In theory, a cost-plus contract lets the builder give you a lower bid, by passing the risk of rising prices to you. If prices do not go up during the 6-8 months of building your house, you will save money. If prices do go up, the house could cost you more than on a fixed-price contract.
In practice, a builder could give a low estimate of what the total cost will be in order to get your job and only later do you find out what the real cost is. Some builders will combine cost-plus with some fixed-price limit that the cost will not go over.
Unscrupulous builders may claim a small percentage profit, but then get kickbacks from suppliers and subcontractors. If you do go for a cost-plus contract, it may be worthwhile to verify some of the prices you are given. The ideal way to check them would be against what someone else building a house on a fixed-price contract is paying. Since lots of houses are always under construction in HSV, you should have no trouble finding someone to compare prices with.
At best, "cost plus" leaves the client responsible for any unforeseen cost increases, so we chose not to go that way. However, we know others who used cost-plus builders and were very satisfied.
But even on a "fixed price" contract, you will find a number of "allowances". These are supposed to be for things that you will be choosing later, such as appliances, kitchen counter tops, doors, plumbing fixtures, and light fixtures.
The builder should not put regular building materials on an allowance if you have a fixed price contract. If the builder says he has to put such items on an allowance because he has trouble estimating the quantities needed, then you should question the experience he has or the amount of effort he is willing to put out to arrive at an accurate bid.
Also, as previously mentioned, the builder normally makes a higher bid for a fixed price contract so that he can absorb the cost of any mistakes in estimating.
Even with legitimate allowances, make sure that the only items in the allowance are things which you will be choosing. For example, you could agree to an amount for an "electrical allowance", thinking that it is supposed to cover the cost of any chandeliers or other special lighting fixtures you might choose. If the builder has also lumped the electrician's labor, wall sockets, and all other basic electrical costs in there and he has bid them too low, you could end up paying thousands of dollars more for "overages" at the close.
The ideal would be to have a contract with NO allowances. This is possible if you have already selected your light fixtures, plumbing fixtures, counter tops, doors, fans, floor covering and cabinets in advance.
Alternatively, when asking for a bid, simply ask the builder to leave these specific items out of his bid with the understanding that the actual cost of these items will be added to the bid at close.
It is worth double checking prices that the builder tells you for appliances, doors, skylights, etc. For example, during construction, we decided that a dark area of the house needed a type of skylight called "Sola Tubes".
Craft came back to us with a $1700 price for two. We protested that as being a lot higher than in ads we had seen and provided Craft with one of the ads. Craft ended up getting the tubes from a third party and the cost was less than $1000.
When we went too far over our floor allowance, we talked to Craft about what we could change to bring the cost back into line with the allowance. We had specified a lot of tile and were considering changing to carpet, but Craft talked to the flooring supplier who talked to his suppliers and among the bunch of them, they got us close enough to our budget to keep our original choices.
Say that you have done some research and found that the average cost of a new house in your area is $125 per square foot. This does not mean that is what a house built to your specs will cost.
Here are some things which can affect cost per square foot:
When I was getting bids for building Judy's house, I asked for a bid for a house with no luxury items such as granite counters, skylights, a larger deck, a covered deck, crown molding, step-up ceilings, and stainless steel appliances, then I asked for quotes for each of those items separately.
This allowed Judy to pick and choose which luxury items she wanted to pay more to add to the cost of the basic house. For example, she decided to forgo a covered patio and get a wall of windows in her house, instead, for about the same cost.
If you are on a budget, I highly recommend this approach. For one thing, you may discover that some things that you thought might cost too much are actually pretty reasonable. For example, I was surprised to find out that skylights don't cost any more than the "sun-tubes" we had put in our house.
Seeing how builders price these "luxury" items is also educational. We saw large variations in such things as granite countertops, ceramic tile, etc., where really, the costs should have been pretty similar since the builders should be paying about the same for materials and for subs to install them.
For Judy's house, I had specified a top-of-the-line Broan exhaust fan for the bathrooms. I checked on the Internet and found a place that had its $430 list price discounted to under $300. I showed this to Jim Buss and he ordered not only the two for Judy's, but some more for future jobs.
From what Jim has told me, they do not get huge discounts on most things like this from suppliers. On the other hand, I saw a combination microwave oven and cooktop exhaust fan at Lowes for only a few dollars more than the very cheapest price I could find for it online. Nevertheless, But the absolute best prices I've seen are from Metro Builders Supply in Little Rock.
(Here's a plug for Lowes: I have bought a number of items, big and small, for the house over the years and Lowes has always been very fair, cooperative, well-priced, and easy to deal with.)
Finally, another builder I had talked to for Judy showed us a house where one of the owners had shopped around to get the best pricing for many of the materials in the house, including kitchen cabinets, countertops, carpeting, and so on. While it really should be the builder's responsibility to do this, if you enjoy shopping or if you just want to make sure of the quality or brand of materials you will be getting, talk to your builder about this.