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January 1, 2001

What You Should Know When
Comparing Builders

Four strategies used by builders who quote misleadingly low prices:
[Leave Out Construction Tasks]
[Leave Out Building Specification Details]
[Give Unrealistically Low Allowances]
[Hire Subcontractors Who Bid To The Bone]

[Community Structures's Philosophy]

If you are like most Customers, you will be surprised to learn how difficult and confusing it is to select a builder. You will quickly discover that making an informed decision is not as easy as selecting a television, refrigerator, or car. There are no consumer magazines to provide comparisons and recommendations, and there are probably 50 to 150 builders to choose from in your community.

Your decision would be easier if all builders were offering the same materials, installing them with the same level of craftsmanship, and following up with the same service. Then you would just select whomever had the best price. But if you solicit proposals from 10 different builders, you will likely get 10 very different packages of building materials. Check their past work and references closely, and you will discover very different levels of craftsmanship, professionalism, and Customer service. Comparing them just on price can lead to some very big disappointments down the road.

All you need to do is to visit any large building supplier, such as Home Depot, to realize that builders can select from at least 5 to 10 different levels of quality and price for every item in your house - from cabinets to windows to electrical fixtures to tubs. All you need do is to visit several homes that these builders have built over the years to realize that they don't all build with the same level of craftsmanship. And all you need do is to talk to several of the builders' past Customers to realize that by no means do all builders respond with the same level of service during construction or after the Customer moves in.

It is especially hard to compare the materials used in a home. After all, most Customers don't know which materials are better or which have the best warranty. In addition, many of the materials - such as lumber, electrical, and plumbing - are hidden from view once the house is complete, which makes it hard for you to discover which materials the builder uses even if you see one of his completed homes. It doesn't help that most builders only include a page or two in their proposals about the materials they have included in their price.

Over the last few years Community Structures has found a few builders quoting impossibly low prices. As you would guess, they do this to get in the door. When times are competitive, builders do what they need to do to make a living. The trick is to learn how they perform their magic. Actually, the slight of hand is vercrease the likelihood you will choose them to build your home. If their prices appear lower than the competition's, you will think they are offering a better dealy simple: the builder gives you so little written information in his proposal and contract that you have no idea what you are getting. This allows the builder to give you whatever he chooses.

Such builders routinely leave out the two things that construction proposals and contracts should include:

• A complete list of the construction tasks required to build your home.
  
• A detailed description of the building specifications (known in the industry as the "specs") that the builder will use to complete each task. These specifications include the type and quality of the materials as well as the construction standards.

With modular homes it is easy to think that the list of construction tasks is small. After all, the modular manufacturer delivers a home that is 90% complete. However, there are two types of tasks that still need to be completed to build all modular homes:

• The "site work" done on your land to prepare it for the modular home (land clearing, septic system or town sewer, well or town water, driveway, electric and gas connections, cellar hole, foundation, etc.).
  
• The "button-up" work needed to complete your modular home after it is set on the foundation (plumbing, electrical, heating, and carpentry as well as garages, porches, decks, etc.).

"Stick builders" have to complete the same two types of services. In fact, their "site work" responsibilities are almost identical to a modular builder's. The big difference is that they have a far bigger responsibility for the second task when constructing your home. They have to build it completely on site from scratch. (See our handout, "Why Buy A System Built Home" for more detail.)

Both the site work and construction work is made up of many, many tasks, even for a modular builder. If any of the tasks are left out, it can lead to some significant cost overruns for the Customer. That is why we provide you with two complete quotes: one on the construction services needed to complete your modular home and one on the modular home itself. Our quote on the construction services, which is typically 14 to 20 pages long, provides you with a comprehensive list of the required tasks and the cost to complete each task. We itemize as many of the costs as practical so that you can better evaluate your choices. We even indicate many of the items we have not included, such as the cost for bringing in extra fill, should any be needed.

In addition to our quote on the construction services, we provide you with a 43 page quote on the modular home you have selected. It itemizes all of the features you are considering - from cabinets and floors to windows and doors to siding and shingles - and what each of them costs.

Together, our two quotations provide you with a comprehensive list of the materials, construction tasks, and construction specifications that you need and have selected. If you use our two quotes when evaluating proposals from other builders - including "stick builders", you will appreciate how much information we have included. You will also help protect yourself against mistakes, misunderstandings, and misrepresentations. And you will make a more informed decision.

So let's discuss the four strategies used by those builders who quote misleadingly low prices.

First Strategy: Leave Out Construction Tasks

The first strategy used by builders is to leave out required construction tasks from their proposals and contracts.

Sometimes builders leave out one or two large tasks. For example, they include installing the basement walls and floor but leave out the "bulkhead", which gives you access to the basement from your back yard. More often they leave out several small tasks that need to be done to complete your home.

For example, they list digging the foundation hole but not whether they have included any perimeter drainage, even when soil conditions are likely to require this to prevent a wet basement. Or they leave out tree stump or trash disposal, even though someone will need to take care of these tasks. It is important to realize that many of these small tasks cost only a few hundred dollars each. But when several of them are left out, it can add up to a few thousand dollars.

Although you will need to complete all of the tasks your builder has left out of his contract before you will have a finished home, you probably won't realize what you're in store for until construction is underway. When you discover the problem and confront the builder about the tasks he left out, he will agree that you need them completed but correctly point out that since the items weren't included in his contract, he is not obligated to complete them without additional compensation. He will then offer to complete them - in fact, he will be very happy to do so - for an additional fee. Since you and your bank didn't budget for these items, this is a big source of what are known as "cost overruns".

By the way, this way of selling is sometimes known as "low-balling". The idea is to leave out costly items to make the price seem wonderfully low. Once you are "hooked" with a signed contract, the builder can then charge you additional money to complete all the tasks he left out.

Second Strategy: Leave Out Building Specification Details

The second strategy used by builders is the most common: they leave out the building specifications they will use to complete the tasks.

Many builders only list the tasks they intend to complete in their contracts. But unless they also detail the building specifications, you have no guarantee of what you will be getting when they complete the tasks.

Here's an example. When a builder lists the task "install a forced hot air heating system", he should also tell you the number of zones and whether an air filter and dehumidifier are included. There is nothing wrong with the builder offering one zone and no air filter or dehumidifier, if this what you want and what your budget will allow. But this should be your choice, not his secret. Here's another example. Many builders include the following description in their contracts to indicate that they are building a garage: "Build an attached 24' x 24' two-car garage". There is little doubt that the builder will give you a two-car garage built to that size. But that's all you can be sure of. Here's what you don't know. Are you getting one overhead door (instead of the two doors you had had assumed you were getting), and will the one door come with a garage door opener? Will the garage have any windows? Will it have a passage door to the backyard? You will eventually find out the answers, once the builder has started construction. But will it be the garage you really wanted?

As you can see, when a builder does not detail the building specifications, he retains the right to choose any "spec" he sees fit, as long as it meets the minimum building code. Since to complete each task with a good spec rather than the minimum spec will cost the builder more money, he will often choose the inferior spec. Remember, every dollar he saves on labor and materials is another dollar he gets to keep.

The claim that builders routinely leave out important specifications is a little confusing to Customers because most builders do include some specifications. For example, builders know they need to specify the stud size of the exterior walls (e.g., 2" x 6") and the amount of insulation in the walls (e.g., R-19). And they will often inform you of the brand of the windows they are using (e.g., Andersen). Why? Because they know you will probably ask for these specifications. They will then leave out other equally important features, hoping you never ask about them.

Here's a third example. Many builders do not put in writing how they will build the stairs in a two-story home. This leads you to guess how wide the stairs will be and what kind of stair railings, if any, will be used. There is a big difference between stairs that are 36" wide and those that are 42" wide. The 36" wide stairs installed by most builders aren't nearly as elegant, and they're difficult to negotiate when moving furniture.

How these stairs are finished also makes a big difference. Some builders build a sheetrocked half-wall capped with a painted pine board rather than install railings. Many builders who do install railings use lumber yard quality materials, only put them on one side of the stairs, and install them on only a few steps. Compare this to custom oak and maple railings, installed on both sides of the stairs, and extended several steps up the stairwell. If these differences matter to you, you will want your builder's contract to state what you are getting.

Customers can sometimes be misled about the specifications they will receive when they see a model home or a house under construction that displays upgraded features. It is very easy to assume that what you see is what you get. The truth is that what the builder gives you in writing is what you get, and if it is not in writing, you will get what the builder chooses to give you.

Sometimes you are never given a chance to choose the better spec, since you only discover the inferior spec after the work has been completed. At other times the builder will call the inferior spec to your attention after you have signed the contract. Just before starting to work on your garage he will ask, "Have you thought about adding a passage door to your backyard? This will make it easier for you to carry things between your yard and garage." When you ask in disbelief why he isn't already providing one, he will say it was the only way he could give you the price he did. You can be sure he is telling you the truth. When he gives you the new price to add the door, you will often find that he has charged you a premium. After all, he knows it is easier for you to hire him to complete the additional work than to find a new builder.

All of these examples are sources of "cost overruns", since many Customers feel trapped into paying the additional charges to get the better building specs.

A related strategy often used by "stick" builders is to give a verbal description of your house without any accompanying accurate scaled drawings or blueprints. This is similar to leaving out the building specifications in that the contract gives you a general idea of what you are getting, but few concrete details you and your lawyer can be sure about. Signed scaled drawings or blueprints are the only way you can be sure you will receive the number of cabinets in the kitchens and baths that you need or that you will get the doors, lights, and electrical switches in the places you expect.

By the way, selling one's construction services by leaving out the building specifications is a form of "baiting & switching". The idea is for the builder to get you hooked by telling you prices you can afford without telling you what you will get for your money. Once you have signed his contract, it is OK with him if you discover that you need to pay him more money to switch to the better specs.

Third Strategy: Give Unrealistically Low Allowances

The third strategy used by builders involves giving the Customer unrealistically low "allowances".

With this technique the builder gives you an allowance to complete a task, rather than a fixed price. The allowance can be for the cost of either the materials, the labor, or both. Since the allowance determines how much money is available to complete the task, it limits the quantity and quality of the building specifications that can be used. The lower the allowance, the fewer the materials and the poorer the spec.

For example, the builder might give you a $3,000 allowance to complete your kitchen. After you sign a contract, he instructs you to select your cabinets. When you visit his recommended kitchen store, you discover that the cabinets which meet your allowance are unacceptable to you. Worst, you learn that the cabinets you really want - with the size kitchen you really need - will cost $4,800. And that's not counting the extra $200 for the special sink you wanted. So you now have a choice of either shrinking your kitchen, getting a lower grade cabinet and sink, or spending $2,000 more than you budgeted.

Allowances are often used by "stick" builders. Since it takes a Customer and builder a lot of time and several meetings to select all of the hundreds of items that go into a "stick-built" home, the Customer will often be asked to sign a contract before many of the items have been selected. The builder then covers himself in his contract with allowances. This means that the spec and price are continually being adjusted as each construction item is finalized by the Customer. The only way around this is for the builder to give you a multiple page contract that details every construction item and its spec. Since this rarely happens, allowances are a third - and quite common - source of "cost overruns".

Fourth Strategy: Hire Subcontractors Who Bid To The Bone

Another strategy used by builders to offer low prices is to hire the least expensive subcontractors (excavators, plumbers, masons, electricians, carpenters, etc.) available at the time.

Sometimes this is just good business practice, and one that can benefit you. At other times, it can cause you significant problems.

For example, if a subcontractor is hiring himself out at desperately low prices because he has little work, he is not going to be able to give you his better materials. Since every dollar that he saves on materials is another dollar that goes into his pocket, he is going to use the least expensive materials, usually whatever is on sale at Home Depot that week. There is no extra money available for the better materials when the bid is made "to the bone".

Another problem that frequently happens is that a subcontractor who is "giving away his labor" must usually have more than one job going at a time to earn a decent living. By squeezing in more jobs in less time, he can compensate for his reduced wages. Such a subcontractor is going to put in the least amount of time possible to complete your job. Often the workmanship suffers.

This problem is compounded when the subcontractor gets offered another full paying job before he begins or finishes your job. When that happens, he will do everything he can to work on the other job rather than yours. He will either rush through your job, or he will delay work on yours until he finishes the other job. If he delays work on your job, it can cost you a lot more money than if your builder had hired a subcontractor at a slightly higher rate. The reason is that you could pay several additional weeks of rent as well as interest payments on your construction loan, both amounting to hundreds of dollars or more, while you wait for the subcontractor to complete his work. The problem will be aggravated if other subcontractors cannot begin their work until the first subcontractor completes his.

A builder who has had to "give away his work" is not going to be as enthusiastic about standing behind his work after he has been paid. He may believe that since he gave you more for your money than you paid for, you don't have a right to ask him to take care of the little problems. He may also feel that whatever time he has to work must go to the new jobs that will give him his next pay check. He may be forced to help you because the law requires he warranty his work for one year, but his heart won't be in it, and he certainly won't give you one extra day beyond 365. A good subcontractor includes a small amount of money into his fee to cover return visits to your home so that he can get the job right. When he is paid a fair wage, he willingly comes back as many times as needed to keep you happy.

It is also worth mentioning that a subcontractor who does not have to "give away his work" is also a subcontractor who is going to be in business for a long time. And a subcontractor who stays in business is one who will be able to stand behind his work. He is also one who will care about his reputation, since he knows he is going to be around in 10 years. Last, but not least, the reason the better subcontractor doesn't have to give away his work when others do is because he already has a strong reputation that assures him of work. Remember, almost no one willingly works for less than he has to. If the builder only needs to pay a subcontractor bottom of the barrel wages, sometimes there is a reason that will cost you in the end.

Community Structures's Philosophy

Our philosophy is to inform you of everything you need to know to build the home of your dreams at an affordable price. We want you to know all of the tasks and building specifications. We recognize that if you don't get your builder to complete all of the tasks - to the right spec - the first time, you will have to either pay the same builder more money to complete them or hire someone else. That's if you have any money remaining to complete the work. This is why our typical price proposals contain 32 pages of specifications and tasks for the modular home and another 15 pages for the turnkey construction services. Sometimes our philosophy makes our prices seem a little higher than some of our competitors' prices. But if you actually do an apples-for-apples comparison, you will find that we are always fairly priced. We just give you a lot more for your money.