Author Archives: Christopher P. Finney

This article is the fifth in a series on new construction.  The contents of this series of articles apply to commercial as well as residential projects.

When building new, one of the main decisions the builder and the buyer need to address is whether the price will be fixed or vary with the price of materials, subcontracts, permits, etc.

This decision first should hinge off of whether a fixed set of plans for the project have been agreed upon in advance, and important price variables such as site work, soil conditions and governmental requirements have been fully explored.  If so, the project may be ripe for a fixed price contract.  If not, it is difficult for the builder to provide a fixed price, and the project is more suited to a cost-plus arrangement.

A fixed-price contract is as it sounds, for a fixed sum.  A cost plus contract says that the buyer pays all of the builder’s actual costs to third party contractors and material men, along with permitting costs, and then adds a margin for overhead and profit.  There are other options, such as cost-plus, subject to a guaranteed maximum price.

In each of these three contract scenarios, the issues of change orders, allowances and selections can still significantly impact the price.  Read about those here.

Fixed-price

In a fixed-price contract, since the builder is taking the risk for pricing variations and project “unknowns,” it typically wants a higher margin (i.e., profit and contingency) to account for that risk.

Cost-Plus

Sometimes a buyer wants to avoid paying that margin and is thus willing to accept the pricing risks accompanying a cost overrun.  Further, if the scope of the project is not tightly defined at the front-end (what is to be built and when it is to be built), then a cost-plus contract may be the only practical option.

“Headlights on” or “Headlights off”

Because a cost-plus contract can be an open-ended checkbook for the builder, we advise buyers to “turn the headlights on” during that process, and (i) start with a detailed line-item budget of anticipated construction costs and (ii) monitor performance throughout the construction process against that line-item budget.  As the project starts to run off the rails cost-wise, the buyer can rein in the project by scaling back the scope.  In any event, he is not hit with a surprise at the end of the project.

Building a new building is one of the more significant investments a business or individual will undertake, and the pricing of that product is one of the more important decisions in that undertaking.  Consider carefully how the product will be priced before the project starts.

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This article is one in a series on the Finney Law Firm blog on new construction.  Read more here:

New construction: The problem of “what” is to be built >>

New construction: The “when” >> 

New Construction: Change orders, allowances, and selections can significantly impact price >>

New Construction: On whose land are you building? >>

New construction: What form of contract?

New construction: Ohio residential buyers absolutely protected from liens in limited circumstances

 

This article is the fourth in a series on new construction.  The contents of this series of articles apply to commercial as well as residential projects.

When structuring the contractual relationship between a buyer and a builder, one of the first considerations is: On whose land will the project be built?  For, if the builder is building on land owned by the buyer, we are addressing a pure construction contract, where if we are building on land the builder owns, and he will convey title at the end of the project, we are addressing both a construction contract and a real estate purchase contract. and a different set of issues will need to be addressed.

Building on land owned by the buyer

When building on land owned by the buyer, the buyer will own the improvements throughout the construction process, and ultimately control legal access to the site.  If a falling out occurs between the builder and the buyer, the buyer can remove the builder from the job and complete the project with another builder.

Typically in this instance, the buyer will pay the builder in installments as the improvements are completed.  As a result, the buyer will have to obtain his own financing and his own insurance on the project.  The buyer also needs to assure that he has not paid more for the improvements in place  than they are worth at any point in time, for if the builder walks off the job the buyer must have sufficient funds remaining to complete the project with another builder.  Finally, the buyer needs to make sure all subcontractors and material men are paid with each draw, so that mechanics liens do not attach to the project.

Building on land owned by the builder

In a situation where the builder owns the land, the buyer’s is simply buying land, building and other improvements at the conclusion of the construction project.  In this instance, the builder wants a significant down payment from the buyer both to show the buyer’s bona fides in performing under the contract, and also in some cases to finance the construction project.  But the buyer must realize that this is basically an unsecured loan to the builder, and in the event of the builder’s default of the contract, or a contact dispute, the buyer will have a hard — perhaps impossible time — recovering those funds from the builder.

Under this type of contract, the buyer will not pay installments throughout the construction project, but rather the builder will finance the project himself or with third party funds.  The builder will insure the project through closing.

The issue with this type of contract is that buyer loses control of the project: He can’t speed construction, control the job site, or assume control of the property in the event of the builder non-performance.

Also in this type of contract, the buyer needs to protect himself as to quality of title, closing prorations, and other issues typical in a contract for the conveyance of real estate.

Buyer conveys lot to builder

In some instances, the buyer will own the land at the beginning of the project, but convey title to the builder as a sort of down payment.  At the end of the construction project, title to the property is then conveyed back to the buyer. The issues in this instance are the same as “building on land owned by builder,” set forth above, as throughout the project, the builder will own the land and the improvements.

Know the type of construction you intend to undertake, and use a contract crafted to protect yourself in that circumstance.

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This article is one in a series on the Finney Law Firm blog on new construction.  Read more here:

New construction: The problem of “what” is to be built >>

New construction: The “when” >> 

New Construction: Change orders, allowances, and selections can significantly impact price >>

New construction: Cost-plus versus fixed-price >>

New construction: What form of contract?

New construction: Ohio residential buyers absolutely protected from liens in limited circumstances

This article is the third in a series on new construction.  The contents of this series of articles apply to commercial as well as residential projects.

The essence of a real estate contract is that a buyer pays money in exchange for title to real property.  In the case of new construction, as discussed here and here, the added difficulty is describing with precision the improvements to be built — defining what the builder is going to deliver.

But defining what the buyer is going to deliver is also a difficulty, for — because we don’t necessarily know the details of what is to be built at contract signing — we also don’t low the final price.

So, the starting point is a clear starting point.  At the time of the signing of the contract, it is important to know what the builder has committed to build — and what he has not committed to — and what the buyer has agreed to pay for that product.  Once we have that foundation, we can address the construction changes and price changes from that point.

Change orders

Builders work on tight budgets and tight schedules.  If the buyer decides mid-course to change something about the construction, it involves re-engineering the project, new material orders, and new subcontractor agreements.  The change may well upset the entire construction schedule, which impacts the builders’ costs.

So, it is important that a project be planned well from its inception, and that change orders be kept to a minimum, if the goal is keeping the construction budget under control.

As a result of the variables set forth above,  Builders typically want the right to reject change orders.  In some instances, the contract calls for change orders to be priced at cost increases plus an increment — 10% to 20% – for the builders’ inconvenience in planning the change.  In other circumstances, the builder has the right to price change orders as he sees fit.

Allowances

Allowances are the “hidden” price bombshell in many contracts.  This is so because the builder typically sets the level of allowances, but if they re set too low — below what an average homebuyer would select, then the buyer invariably is going to exceed the allowance, and thus incur a price increase.  As a result, it is critical that allowances be set at a reasonable level, or the buyer should be aware that the contract price will rise through the construction process.

Selections

In addition to allowances, some builders offer selections that do not increase price — as long as the buyer is willing to live within the selections provided, such as for carpet and other flooring and cabinetry.  If the buyer desires to stray from the limited selection offered by the builder, then he exposes himself to additional price increases.

The new construction process can be tricky, and confusion cover change orders, allowances and selections are one key area where costly surprises arise.

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This article is one in a series on the Finney Law Firm blog on new construction.  Read more here:

New construction: The problem of “what” is to be built >>

New construction: The “when” >> 

New construction: On whose land are you building? >>

New construction: Cost-plus versus fixed-price >>

New construction: What form of contract?

New construction: Ohio residential buyers absolutely protected from liens in limited circumstances

This article is the second in a series on new construction.  The contents of this series of articles apply to commercial as well as residential projects.

In this blog entry, we discuss the “what” is to be built under a new construction contract, residential or commercial.  The problem is that, unlike with an existing building, in order to properly contract for the construction of a new building, the parties must carefully define “what” is to be built using words and drawings.

I teach continuing education classes on new construction, and there I define this problem of describing the improvements to be built as a 4-dimensional problem, with the first three dimensions being the height, width and depth of a project — the physical description of what is to be built.  The 4th dimension, then,  is “when” the project is to be delivered.

This blog entry addresses that topic — the 4th dimension of a construction project — when will the finished product, or substantially finished product, be delivered to the buyer.

There are a myriad of issues that can impact the “when,” starting with selections to be made by the buyer.  Here are just a few of the issues impacting the timing of completion:

• The buyer’s inability to make timely design and selection decisions for finish items.  This is the item most frequently cited by builders as to why the buyer has slowed the project and driven up costs.
• Design changes.
• Unexpected site conditions, such as bad soil or environmental problems.
• Regulatory issues,such as zoning and building permits and roadway access..
• Utility availability at the property line.

The timing issues encountered in a construction contract significantly impact both construction costs and operational issues confronted by both buyer and seller.  Thus, having a realistic understanding of timing issues at the front end of a construction project is important, and deciding how to allocate the risk of timing issues is a critical contract consideration.

This article is one in a series on the Finney Law Firm blog on new construction.  Read more here:

New construction: The problem of “what” is to be built >>

New construction: Change orders, allowances and selections can significantly impact price >>

New construction: On whose land are you building? >>

New construction: Cost-plus versus fixed-price >>

New construction: What form of contract?

New construction: Ohio residential buyers absolutely protected from liens in limited circumstances