Three-Bid Reality Check for Your Custom Home

The definition of conventional wisdom is advice repeated so often that people accept it unthinkingly. That non-critical acceptance often makes conventional wisdom dead wrong.

A good example is the conventional advice to get three bids when choosing a builder for a custom home. That advice doesn’t tell you how to get those bids and doesn’t warn you about the obstacles that make accurate bids tough to get and difficult to compare. This misunderstanding lies behind many horror stories people tell about their homebuilding experience.

Realistic, easy-to-compare bids have three things in common. They come from comparable builders, are structured in exactly the same way and are based on excruciatingly detailed plans and specifications. It’s a rare trifecta at best.

This leaves you with two options: Do the work needed to remove the obstacles or skip bidding altogether. First, however, you need to understand those obstacles.

Vetting Bidders

How do you find three good bidders? Start by interviewing four or five comparable and qualified builders; for an $800,000 home they should all have stellar reputations for building $800,000 homes. Ask your architect (if you have one) for recommendations.

Remember that you’re committing to a relationship that could last for several months so you should choose someone you like, trust and can collaborate with. Calls to past customers can help you get a sense of this.

A good match will include personal compatibility as well as your comfort with the builder’s processes and policies. For instance, if you want the option of making changes after work gets underway, make sure you can live with the builder’s change order policy.

Finally, invite two or three to submit bids. Be aware that an established, professional company may want to know who it’s bidding against and may decline to waste its time competing with a known low baller. (Lowball bids usually cost more in the long run but that’s another story.)

Quality Documents a Must

Before soliciting bids, make sure the most important prerequisite is in place: accurate and detailed construction documents. These include plans—instructions on how to build the home—and specifications or “specs”—the list of products that will go into it. These documents need to be detailed, including written descriptions of everything from the structural materials to the fixtures, finishes and appliances. They also must be error-free.

Architect-generated documents don’t guarantee accuracy or detail. Skilled architects know how to turn your vision into a plan, but they usually leave spec writing and plan review to the builder.

“The plans we get from homeowners and architects are almost never 100 percent complete or correct,” says Flagstaff, Arizona, homebuilder Dennis Dixon. Most plans he receives include mistakes, omissions and code violations his staff needs to correct, along with boilerplate language with no relation to the project.

Good specs are just as rare. “In 35 years, I have had just one or two projects where the information we received ensured that our bids would be comparable to other bids,” says Michael Wood of Providence Homes in the Dallas-Fort Worth area. Vague or incorrect specs force each bidder to make assumptions, and since each will almost certainly make different assumptions, in reality they end up bidding on different projects.

To create an accurate bid from such documents, the builder needs to spend an enormous amount of time fleshing out the specs. Even if you find three builders willing to do that for free (not likely), chances are their specs would differ, leading to widely divergent bids. If that weren’t enough, each builder’s assumptions would differ from yours, setting the stage for conflict and disappointment.

The only way to avoid this is to make product decisions before asking for bids. Most homeowners don’t know how to do this, but one of the builders should be able to help for a fee.

Make sure to limit allowances, which allocate money to specific items but let the homeowner postpone the actual choices, to four or five items at most. And beware of builders who will bid on documents that exceed those limits. “A plan with 20 allowances really isn’t in your best interest,” says Bill Reynolds, president of New Haven Homes in Albuquerque, New Mexico. “A builder who imposes no limits is showing poor leadership and will be less likely to keep the project on schedule and on budget.”

For those few unavoidable allowances, it’s crucial that each bidder use the same numbers. If you have allotted $30,000 for kitchen cabinets, that number needs to be on every bid.

Everyone on the Same Page

Make sure each company uses the same bid sheet, with costs organized into identical categories. The architect may have a standard bid sheet; if not, one of the builders might.

According to Wood, the final bid should include a bottom-line price, an estimated completion date and the builder’s change order policies and costs (including administrative charges). Set a due date for the bid agreeable to all; three or four weeks is typical for a custom home.

Before making the final choice, you and the architect (if there is one) should meet with each bidder to review their bid, ask clarifying questions and confirm numbers. You don’t want to reject a great candidate or run into problems later because of a math error or typo.

Don’t be surprised if a busy builder wants to get paid for a detailed bid. It’s a big investment of time and energy. “My staff has to put in 40 hours over a 2-3 week period to create an accurate cost estimate for a new custom home,” Dixon says. “And that’s only after the plans and specs are 100 percent complete.”

There’s Another Option

Sometimes all of the bids come in too high. “Two out of 10 home plans don’t get built because they’re over-designed for the homeowner’s budget,” Wood says.

That, along with the obstacles to getting accurate bids, may lead you to skip competitive bidding altogether. Dixon finds that people who have built homes in the past are more likely to make this decision.

“Many have been through a past bid process that felt like a piranha-infested river, where they heard conflicting pieces of advice and were never sure who to believe.” Dixon says that such people prefer to find a reputable professional builder they trust, who can be involved in the home’s design from the beginning.

If you take this route, you will still interview comparable builders but will focus on identifying a good fit, not on shopping for price.

The ideal process is to choose an architect and builder that can work as a team before starting the design. That way the builder can create budget estimates as the plans get drawn, ensuring that you that get the home you want and can afford.

Start by walking the site with the architect and the builder, then ask for a preliminary design concept and a ballpark price. If you don’t like or can’t afford their first drafts, ask for some value engineering, in which the builder suggests ways to lower costs while still giving you much of what you want. These could range from floor plan and facade changes to the use of different materials.

Once you’ve settled on a design concept and price range, the builder and architect can work together on developing plans and specs. You will end up with a negotiated price but chances are you will be happier than if you had gotten conventional bids.