Good afternoon.

I have a question about bids you receive from builders for new construction.  My understanding is that if you sign a contract for a guaranteed maximum price, that is pretty solid.  The builder has already built in contingencies to cover his or his subcontractors' mistakes in the bidding process, etc.  The price can only go up based on materials increasing in price by over 25% or whatever the contract states.  This is what several builders have told me and what I have read.

On the other hand, I keep hearing people say that there will always be cost overruns and you shouldn't trust a builder's bid.  

Which of these is correct?

I like to be vigilant and a realist.  But I also don't like to be limited by irrational fears/concerns either.  It seems to me if a contract states that the price is a guarantee, then it is probably a guarantee barring some unusual circumstance.

@Jim Macedon The contract should have all this laid out and will be the "go to" if something out of the ordinary happens. The more information the builder has then the better his bid should be in theory but it doesn't always happen that way. Make sure he has all his development cost in his bid and all the finishes you want so he can give you an accurate bid. If not, then if he gives you a maximum bid with all his contingencies laid out then you should be ok.  

People are saying that their builders are raising their prices during the build? I don't see how thats possible given that the buyer has likely gotten a construction loan and the bank isn't going to allow them to take out draws based on some new figure. And the bank isn't going to pay them if their final draw doesn't come after the home is finished and ready for move in.

My guess is those "other people" may have wanted changes added to the initial houseplan/contract and they had to come out of pocket for those. But I'm guessing the bank had to be involved somehow in that process and had to see that the buyer was coming out of pocket for those changes before the lender would approve.

Otherwise, if a buyer were to add 30k in extras, then the construction loan would be 30k short and the builder wouldn't finish the home. The lender would be left with a construction loan maxed out on its payments but a house that they couldn't sell because it wasn't completed.

I'm not a builder so I'm sure there's someone in here that can answer that one. But logically that just makes no sense that a builder can raise their prices AFTER a construction loan has been approved by the lender.

That's what I figured as well. But in other posts on BiggerPockets, people seemed to be saying that I should expect to pay more because "every project has cost overruns."  Maybe I misunderstood or misinterpretted.

Most of the “cost overruns” are due to: a clear lack of scope of what is and what Not is included, incomplete or bad plans, lack of detail as to finishes, quality of materials, etc. This should be much less in a build verses as renovation where you find unknown preexisting conditions.

The bid should be reliable , its the change orders that will run up the price . ANYTHING outside the scope of work is a Change order and the $$$$$$ add up quick . Want an electrical outlet , thats $95 , want chair rail in the dining room , add a grand , ..........it just keeps adding up .

@Jim Macedon
1.if your building new construction you should provide the contract not the builder
2. Your scope should be very detailed for every trade
3. Plans and specs should be relevant and thorough

As noted above, good contract + good plans = good project

@Chris Seveney Good Plans!!! Great Pointer....if it’s on the plans there are no excuses!