General contractors are familiar with every stage of building a rock-solid and beautiful home. To a large extent, the physical act of building is the most enjoyable part of a contractor’s job. It’s the advanced planning of costs and fees that presents the real headaches and challenges.

A lot can go wrong when predicting costs and fees associated with a building project. Home buyers want the most cost-efficient contract possible and this puts builders under pressure to create a financially competitive bid that also covers all the costs and expenses of the project — even the unexpected ones.

Let’s take a closer look at the most important components of a residential building contract.

The Two Types of Home Building Contracts

There are two primary kinds of home construction contracting formats that builders commonly use to map out contractor fees for residential construction. Both these types of contracts offer slightly different contractor fee schedules:

  • Competitive bid contracts: During the competitive bidding process, the home buyer selects several contractors and gives them about three weeks to create a bid. The home buyer will then take the time to review each of the bids from the different contractors and ask questions for clarification. The home buyer will probably want to interview the contractors before making a final selection.
  • Cost-plus home building contracts: Cost-plus building contracts have become a lot more popular in recent years because they offer transparency and a simple structure. A cost-plus contract includes
    • (1) the base costs associated with building the project,
    • (2) plus the contractor’s management and coordination fees, a.k.a., the construction management contracts and fees percentage. This percentage is usually around 15 percent of the base costs.

cost-plus building contract

Markups That Affect Total Contract Costs

Building contractor fees will include an array of extra costs called “markups.” Markups can increase total fees by 10 to 30 percent. Here’s a list of typical markups included in home building contracts:

  • Insurance: Insurance costs include the price of general liability insurance and tools, machinery, leased equipment and workers’ compensation.
  • Taxes: Taxes may include city, county, state and federal taxes that apply to the job. Other taxes may include Social Security, Medicare and unemployment taxes for employees.
  • Labor burden: A typical contractor fee for labor burden involves the expenses of employing a team of workers. These include costs relating to recruitment, training, taxes, vacation time, retirement plans and other expenses.
  • Office and staff: These are the costs of renting or maintaining an office space where staff members work, including costs associated with phones, utilities, security, landscaping and more.
  • Transportation: Transportation costs relate to the transportation of people and materials to and from the job site. Expenses associated with contractor-owned vehicles, rental vehicles and the rental of large equipment such as dump trucks and backhoes. Insurance and maintenance costs associated with these vehicles may also be included in transportation costs.
  • Communications: Communications costs are associated with maintaining communication devices such as smartphones, email and computers for staff to stay in touch with each other and the client.

Contractors may be tempted to include a “warranty” fee, but this is not the general practice. Instead, home building contractors will cover the costs of follow-up repairs out of their profits from the job. This is part of the responsibility of being a contractor, and why it’s essential to scope out the job, and complete it, as perfectly as possible.

Create Accurate and Competitive Bids for Your Construction Contracts

Since 2001, Houston Plans & Permits has assisted Houston-area contractors and their clients throughout the permitting and home design process. Houston Plans & Permits takes the guesswork out of the painstaking aspects of producing house plans, allowing you to focus on what you do best: Building rock-solid and beautiful homes that your customers fall in love with.

Contact us today to get a quote on your next project!