June 18, 2015
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.
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 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.
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.
This article is one in a series on the Finney Law Firm blog on new construction. Read more here: