Your Construction Contract Is the Foundation of Your Entire Project
If your custom home is built on a physical foundation of concrete and steel, it is built on a legal foundation of contracts and agreements. The construction contract defines every aspect of the relationship between you and your builder: what will be built, how much it will cost, how long it will take, what happens when things change, and how disputes will be resolved. A well-written contract protects both parties and provides a clear framework for navigating the hundreds of decisions and unexpected situations that arise during any building project.
Too many homeowners sign construction contracts without fully understanding what they contain. The document may be thirty or forty pages of legal and construction terminology, and the temptation to skim and sign is understandable. But this contract governs one of the largest financial transactions of your life. Taking the time to understand its key provisions is not optional. It is essential.
Fixed Price vs. Cost-Plus Contracts
The two most common contract structures in custom home building are fixed price (also called lump sum) and cost-plus. Each has advantages and trade-offs, and understanding the difference is fundamental to managing your budget expectations.
Fixed Price Contracts
In a fixed price contract, the builder agrees to complete the defined scope of work for a specific dollar amount. The price does not change unless you request modifications through the change order process. This structure gives you maximum budget certainty. You know exactly what the project will cost before construction begins, assuming you do not make changes.
The trade-off is that the builder assumes the risk of cost overruns, and they price that risk into the contract. If lumber prices spike or a subcontractor’s bid comes in higher than expected, the builder absorbs the difference. To compensate for this risk, fixed price contracts typically include a margin that accounts for potential cost increases. You may pay a modest premium for budget certainty, but many homeowners consider that premium well worth the peace of mind.
Cost-Plus Contracts
In a cost-plus contract, you pay the actual cost of all materials, labor, and subcontractor expenses plus a predetermined fee or percentage that represents the builder’s overhead and profit. This structure provides complete transparency into where every dollar goes and can result in a lower total cost if material prices are favorable and the project goes smoothly.
The risk is that your final cost is not known until construction is complete. Cost overruns are passed directly to you. While a cost-plus contract gives you visibility into actual expenses, it requires a high degree of trust in your builder and a willingness to accept budget variability. Some cost-plus contracts include a guaranteed maximum price (GMP) that caps your total exposure, which provides a middle ground between pure cost-plus and fixed price.
Understanding Allowances
Allowances are placeholder amounts included in the contract for items that have not yet been selected at the time of signing. Common allowance items include lighting fixtures, plumbing fixtures, flooring, countertops, tile, and appliances. The allowance represents the builder’s estimate of what you will spend on each category.
How Allowances Work
If you select a granite countertop that costs $4,200 and the allowance was $4,000, you owe an additional $200. If you select a countertop that costs $3,500, you receive a $500 credit. Allowances are reconciled during or after construction, and the adjustments are documented as change orders or allowance reconciliations.
Pay close attention to allowance amounts when reviewing your contract. Unrealistically low allowances make the contract price look lower but will result in significant overages when you make your actual selections. Ask your builder to explain how each allowance was calculated and whether it reflects the quality level you are expecting. A good builder will set allowances based on realistic market prices for the grade of product appropriate for your home.
Payment Schedules
Construction contracts specify when and how much you pay throughout the project. The most common structure is a draw schedule, where payments are made at defined milestones as construction progresses.
Typical Draw Schedule Milestones
A typical residential draw schedule might include payments at contract signing, foundation completion, framing completion, rough mechanical completion (plumbing, electrical, and HVAC), drywall completion, and final completion. Each draw corresponds to a percentage of the total contract price and is typically contingent on the builder demonstrating that the work has been completed to that milestone.
If you are financing your build with a construction loan, the lender will have their own draw inspection process. A bank inspector will visit the site before each draw is funded to verify that the work matches the requested percentage. This provides an additional layer of oversight that protects your investment.
Retainage
Some contracts include a retainage provision, where a percentage of each draw (typically 5 to 10 percent) is withheld until final completion and walkthrough. Retainage ensures that the builder has a financial incentive to complete all punch list items and deliver a finished product that meets the contract specifications. If your contract does not include retainage, consider requesting it.
Change Order Procedures
Changes during construction are nearly inevitable in custom home building. The change order process defines how modifications to the original scope of work are documented, priced, and approved.
What a Good Change Order Process Looks Like
Every change order should be documented in writing before the work begins. The document should describe the change, its impact on the contract price (both additions and credits), and its impact on the construction schedule. Both you and the builder should sign the change order before any work associated with the change proceeds. Verbal agreements to “figure it out later” are the source of most construction disputes.
Review your contract’s change order provisions carefully. Some contracts include administrative fees for processing change orders, which is reasonable given the time required to re-price, re-schedule, and re-coordinate affected work. Be aware of these fees so they do not come as a surprise.
Warranty Terms
Your contract should clearly define the builder’s warranty obligations. South Carolina provides implied warranty protections for new residential construction, but the specific terms in your contract may provide additional coverage or clarify the process for making claims.
What to Look For
Review the warranty for duration (one year is common for workmanship, longer for structural elements), what is covered and what is excluded (cosmetic issues, homeowner-caused damage, and normal wear are typically excluded), the process for submitting claims, and the builder’s obligation to respond within a defined timeframe. A clear, fair warranty policy reflects a builder who intends to stand behind their work long after the final check is cashed.
Dispute Resolution
No one enters a construction project expecting a dispute, but your contract should address how disagreements will be resolved if they arise. Common dispute resolution mechanisms include direct negotiation between the parties, mediation (a neutral third party facilitates a resolution), arbitration (a neutral third party makes a binding decision), and litigation (court proceedings).
Many construction contracts include mandatory arbitration or mediation clauses that require the parties to attempt resolution through these methods before filing a lawsuit. Understand which mechanism your contract specifies and whether it is binding. Arbitration and mediation are generally faster and less expensive than litigation, but they also limit your legal options.
Getting Legal Review
We strongly recommend having a real estate attorney review your construction contract before you sign it. An attorney experienced in construction law can identify ambiguous language, flag unusual provisions, and ensure that your interests are adequately protected. The cost of a contract review is minimal compared to the total project cost and the potential expense of a dispute arising from unclear contract language.
At Grander Construction, we believe in transparency and fairness in every aspect of our client relationships, starting with the contract. We are a BBB A+ rated custom home builder serving the Greenville-Spartanburg region, and we are always happy to walk our clients through every provision of our agreements. Call us at (864) 412-9999 to learn more.
Frequently Asked Questions
Which is better for a homeowner: fixed price or cost-plus?
It depends on your priorities. If budget certainty is your top concern and you want to know exactly what your home will cost before construction begins, a fixed price contract is the better choice. If you value complete cost transparency and are comfortable with some budget variability, cost-plus may appeal to you. Many homeowners prefer fixed price for the peace of mind it provides, especially on their first custom home project.
What should I do if my builder asks me to approve a change verbally without a written change order?
Decline and insist on a written change order. This is not about distrust. It is about protecting both parties. Verbal agreements are subject to misunderstanding and misremembering, and they leave you without documentation if a dispute arises later. A professional builder will understand and respect your insistence on following the written process.
How do I know if the allowances in my contract are realistic?
Visit showrooms and price the types of fixtures, finishes, and materials you expect to use in your home. Compare those prices to the allowances in your contract. If the allowance for lighting fixtures is $3,000 but the fixtures you prefer will cost $8,000, you know the contract price does not reflect your actual expectations. Ask your builder to adjust allowances to match your intended selections so the contract price is as accurate as possible.
Is it normal for a builder to require a deposit before construction begins?
Yes. Most builders require a deposit at contract signing to cover initial project costs such as permitting, engineering, material ordering, and scheduling. The amount varies but typically ranges from 5 to 15 percent of the total contract price. The deposit should be clearly documented in the contract and credited against the first construction draw. Be cautious of any builder who requests an unusually large upfront payment before any work has begun.