When you’re in the market for a new home, one of the key factors to consider is the overall cost of construction, especially when purchasing a property through a builder. While many buyers are focused on the final price of the home, there’s a behind-the-scenes breakdown of costs that can significantly affect the final price tag. One of the major components of this process is how builders add fees on top of the costs associated with subcontractors as well as for any added materials. 

Here, we’ll walk you through the process of how builders calculate their fees and why they add them on top of the costs paid to subcontractors. We’ll also dive into what homebuyers should understand about these fees while comparing two different models.

The Role of Subcontractors in Homebuilding

Subcontractors play an essential role in the construction of a home. These are the skilled tradespeople who handle specific tasks such as electrical work, plumbing, roofing, flooring, and more. Builders generally hire subcontractors for these specialized jobs because they bring expertise in their respective fields.

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Subcontractors are often paid a set fee for the work they perform, which varies depending on the scope of the task. However, the cost paid to subcontractors is just one piece of the overall puzzle that makes up the final price of a home.

What Are Builder Fees?

Builder fees refer to the additional costs a builder charges on top of subcontractor payments. These fees cover the builder’s overhead, profit margins, and project management responsibilities. Think of builder fees as a way for the builder to cover the costs of running their business, as well as to ensure they make a profit on the home construction project.

Builders typically use 1 of 2 types of business models:

1.    Fixed-Bid  

2.    Cost-Plus 

In the Fixed Bid Model, the contractor sets a price for the entire project. And, you agree to pay $XXX amount for the construction. If you go with this model, you need to make sure every single specification is extremely detailed and you’re good with it. You are likely going to be given a couple of choices for appliances and fixtures and you can’t stray from those choices.  Anything not clearly specified in writing is where the builder can cut corners, use cheaper materials, and skimp in order to pad his pockets. Your project will be rushed, and you will be hushed because you agreed to the price. If you find your contractor is using MDF (Medium Density Fiberboard) cabinets, but you want oak and it wasn’t specified in the contract, you’ll be charged an upcharge for the difference and probably a fee for the change. However, in areas where the builder got away with using a cheaper material or contractor, any money saved by the builder will, of course, NOT be deducted from the total.  

Now, let’s look at the Cost-Plus Model. Here, the builder gives you an estimate.  This is not a fixed cost.  And it’s likely on the low end.  We’ll just go out on a limb and say you will not be paying that number and it definitely won’t be less. The idea is that the builder hires the labor and sources the material and you pay his costs plus his markup (15-25% usually.) However, it is common practice for the builder to multiply the labor by 2.75 before adding his fee.

So, let’s say the carpenter gets paid $1,000 for a job, and the builder multiplies that $1,000 by 2.75 to get $2,750 which is what you will see on your bill as the “cost.”  Therefore, the builder is already pocketing $1,750 for himself before he even adds his fee! Let’s just use 15% for this example. You’ll end up paying $3,245 for a $1,000 job!  But, the builder is saying his markup is only 15%.  According to my calculations, if it was truly 15%, you should only be paying $1,180. And, if the builder makes a percentage on everything you spend, what is his motivation to help you save money? 

The builder is in charge of hiring and sourcing materials.  Do you think he’s going to look for the best price, comparison shop, and find deals? 

Why Do Builders Add Fees?

Builders add fees to cover the risk, time, and resources required to bring a home from concept to completion. Some of the primary reasons for these fees include:

• Business Sustainability: Running a construction company is costly. Builder fees ensure that the builder can remain profitable and cover operational expenses.
  
• Managing Risks: Construction projects come with many uncertainties. Builders add fees to cover the potential for unforeseen costs and delays.
  
• Time and Labor Involvement: Builders spend considerable time managing subcontractors, vendors, and the construction process itself. Their fees compensate them for the time and effort invested in the project.
  

How Can Homebuyers Protect Themselves?

Understanding how builders calculate and add fees can help homebuyers make more informed decisions. Here are a few tips to ensure you’re not paying more than necessary:

1. Request a Detailed Breakdown: Ask the builder for a detailed, itemized breakdown of costs, including subcontractor fees, builder fees, and any other associated costs. This can help you understand exactly where your money is going and give you leverage to negotiate.
   
2. Get Multiple Quotes: It’s always a good idea to get multiple quotes from different builders to compare how their fees stack up. This can give you a better idea of what’s reasonable and allow you to choose a builder that fits your budget.
   
3. Understand the Scope of Work: Ensure that the scope of work is clearly defined in your contract. This will help prevent unexpected cost increases as the project progresses.
   
4. Check References: Research the builder’s reputation by checking online reviews, speaking with previous clients, and confirming that they have a solid track record of delivering projects on time and within budget.
   

While builder fees are an essential part of the construction process, it’s important for homebuyers to understand how these costs are calculated and added to the overall price of the home. By asking the right questions, getting clear quotes, and doing your due diligence, you can ensure that you’re not blindsided by hidden costs and fees.

Builders deserve fair compensation for their time and expertise, but it’s important to recognize how certain payment structures can create conflicts of interest. When a builder’s payment is directly tied to the total cost of your home, they may have little incentive to keep expenses down. In fact, a higher budget can mean a bigger payday for them, which could lead to choosing pricier subcontractors, materials, or fixtures rather than seeking the best value. Homeowners who want more control over costs might consider alternative arrangements, such as fixed-fee contracts or negotiating price transparency, to ensure that saving money is just as much a priority for the builder as it is for them. 

Or, you could choose “owner building” with the help of our Bootstrap Builders Program. Owner building can save you anywhere from 25-35% of what it would cost to build with a builder. For example, that could be a savings of $100,000 on a $400,000 home! 

Building a new home is a significant investment, so knowing where your money goes and how builders structure their pricing is an important step in making sure you get the best value for your money. The Old Barn would LOVE to help answer any questions you may have about this exciting but often challenging process. Contact us today to help make your dream a reality! Here, at Old Barn, we think owner-building is a great way to save big on your home build and maintain control! Don’t wing it! With a big investment like this, it’s imperative that you are prepared, educated and have guidance along the way. Our Bootstrap Builder Program is here for you. But, first download the FREE guide: First Steps to Afford Your Dream Home.