Owning a house is easily part of almost everybody’s dream, and this is reflected in the worldwide statistics. Statistics show that single-family residential construction reached an estimated $267 billion dollars in 2018, up by 8% since 2016, and multi-family residential construction rose by 7% in 2018 with $65 billion is estimated value.
In the United States, it is estimated that if you want to build a new house comes in at $289,000 , and if you want to have 2000 square foot home, it would cost about $150 per square foot. And of course, with all the variables that come into play, the cost could range between $148,000 to $ 431,913. Of course, what constitutes a home is different from person to person and there really is no price limit to how much you want your home will cost. But, the thing is, how do contractors come up with this price? Do they just take it out from thin air, how do they compute it?
Types of Contracts
Before we can understand how residential buildings are priced, we first need to understand the different kinds of contracts which is usually defined as how payment will be given. Typically, there are four types of construction contracts:
Cost Plus Contract. In this kind of contract, the owner assumes most of the risk and pays for the cost of construction purchases, and other expenses that are related to the construction. Variations for this kind of contract include cost plus a fixed percentage, cost plus fixed fee, cost plus with guaranteed maximum price contract.
Lump Sum /Fixed Sum Contract. In this type of contract, the contractor assumes most of the risk. This kind of contract will specify the total cost that will be paid for the duration of the project which the owner and contractor will agree on.
Unit Price. This kind of contract involves the contractor determining a specific price for a certain task. The owner will then pay that price depending on the number of units that the contractor provides.
Time and Material Contract. In this type of contact, the owner pays for the time as well as the materials spent on the project. The owner and the contractor will usually agree on the pay rates and any expenses that might come up during the duration of the project.
How are Residential Houses Priced
The construction industry is different compared to other industries when it comes to pricing because each construction project, is, in its own way unique and needs to have its own price. The construction contract price usually includes the direct project cost which includes field supervision expenses and markup by the contractors for overhead expenses and profit. Of course, there are nuances such as the type of building ( commercial, residential etc. ) which can affect the price as well.
The following are the ways that residential houses are priced.
Speculative Bidding Construction
Competitive bidding starts with a completed set of construction documents that are created and assembled by the architects. Once they have this, they will assemble a list of contractors that they think will be suitable for your project. Usually, the owner will look for contractors that have previous experience building the same type of construction.
Once a set of contractors have been selected, they will be given the construction documents and will be given a set time to complete the documents. Most often, a specific format will be given for the contractors to follow. The contractors will then do a material takeoff either manually, or nowadays with the use of a residential construction bidding software . Usually, the contractors will submit the final bid in a lump sum or unit price value depending on the preference of the client.
A lump sum bid is a total price that the contractor offers to complete the construction project according to the detailed plans and specifications that's in the construction plans.
A unit price bid is used if there are some aspects in the project which are uncertain, this usually involved the quantity of material needed or the amount of labor involved. If this is the case the contractor can submit a list of unit prices for the tasks. The final price that will be used to determine the lowest bidder is based on the lump sum price which is computed by this formula:
Quoted Unit Price Of Each Task x Corresponding Quantity in the owner’s estimates for quantities
The total payment to the winning contractor will be based on the actual quantities used multiplied by the quoted unit price.
Sometimes, private owners choose to award construction contracts to one or more selected contractors. One of the main reasons why clients choose this kind of contract is the flexibility of this type of arrangement which is particularly useful especially when it comes to large size projects or for projects that are a duplicate of a previous project.
Usually, clients choose to work with their favored contractor because they have worked with them before, and they value their expertise and integrity. However, this doesn't mean that the owner's staff will not monitor and evaluate the performance of this particular contractor.
Typically, this kind of contracts requires the compensation of direct project cost plus the contractor's fee as determined by one of the following methods.
Cost plus a fixed percentage
Cost plus fixed fee
Cost plus variable fee
Guaranteed maximum price
Fixed percentage is set at the start of the project while the variable fee and target estimates are usually used as a motivation to reduce cost by sharing any cost savings.
A guaranteed maximum price agreement puts a penalty on the contractor for cost overruns as well as failure to complete the project on time. With this kind of arrangement, amounts that are below the maximum are shared between the owner and the contractor, while the contractor is solely responsible for costs above the minimum.
Speculative Residential Construction
In this type of construction, developers build houses and condominiums in expectation of the demand of home buyers. Usually, the basic needs of home buyers are quite similar, and the way houses are designed can be standardized to some degree ( think of condominiums and apartments which have the same format), developers think that the probability of finding buyers of good housing units within a specific time period is high. Developers are willing to build this kind of speculative construction, and most often, lending institutions such as banks are willing to finance construction of this
In this kind of construction, the developer can set the price for each housing unit as far as they think the market will accept. They can then adjust the prices of the remaining units at any given time depending on the market trends.