By Joanne Cleaver
RISMEDIA, September 5, 2008-(MCT)-The materials used to construct a house aren’t rare-wood, steel, concrete, shingles, copper. Like all commodities, their prices fluctuate.Especially lately. The Association of General Contractors of America reported in June that prices for steel products rose 8.1%, asphalt, 6.7%, and diesel fuel, used to transport those materials, was up 5.7% over the past 12 months.
Construction materials and components were up 13.2% for the six months that ended in June, according to the Bureau of Labor Statistics.
Fluctuating materials’ prices don’t matter if your house is already built. But if you’re considering building or remodeling, or if you’re in the middle of a project, the last thing you want is a stream of price increases from your contractor. Tactics for minimizing mid-project surprises include setting limits on price increases in the contract, considering alternative materials and collaborating with the lender even after you land a construction loan.
Often, buyers are so caught up in the choices of a lot, floor plan and finishes that they pay little or no attention to the contract until they’re emotionally invested in the house, says Roy Wagner, a partner with the law firm von Briesen & Roper and chair of the Wisconsin construction section of the state Bar Association.
“They find a lot, they look at the design, they go through many months of what they’re buying, without looking at the contractor’s proposed business terms,” he says. “Then the contractor pulls out the contract and says, ‘Sign here.’ By then the consumer has lost their leverage, they’re so invested in the process.”
Head this off by asking for a “template contract” at the start, along with the contractor’s references. Review the contract to see the clauses that address price escalation or surcharges on materials. And get a lawyer to advise you on this, the biggest purchase you’re likely to ever make.
Labor costs aren’t usually included in legal language that lets a contractor raise prices midstream. The Association of General Contractors estimates that hourly earnings for construction workers rose about 3.7% in the 12 months that ended in May-not quite in the league with materials.
Negotiate a fixed-price agreement in the contract, Wagner adds. That puts the responsibility on the contractor to hold down materials costs, which he can do by buying materials at good prices and storing them at the job site.
“There’s a natural tension for the homeowner to wonder if (the contractor will) cheapen the project in ways they don’t see because his profit is being eroded,” Wagner says. Add the requirement that you are allowed to review receipts and the actual cost for materials purchased for the project each time the builder applies to withdraw money from the construction account. Keep track of materials prices so you have a point of reference, and ask for data that proves that the materials the contractor paid for are for your project.
Performance and payment bonds are two additional tools, typically used in government and commercial contracts, that can reduce the risk to homeowners when there are material price increases with a fixed-price contract.
Performance bonds essentially provide project completion protection to cover the cost of finishing the project if the builder abandons it rather than finish-sometimes a scenario prompted by spiraling materials costs.
Payment bonds ensure that material suppliers get paid, especially when project costs increase beyond the contractor’s budget.
Wagner says that these bonds can also indicate the financial health of your contractor; to get them, the contractor has to have enough business assets to qualify, or must make a personal guarantee to the bonding company. If the contractor doesn’t qualify, it may indicate that the company doesn’t have enough assets for your project.
The bonds aren’t cheap, though, and typically the homeowner covers the cost.
There are some materials you have to have: shingles, piping and plywood. But others may be more optional than you think.
Bielinski Homes, based in Waukesha, Wis., offers a guaranteed price contract to reassure buyers that they won’t get hit with sticker shock, says chief operating officer Paul Bielinski. “‘I don’t really know what it will cost’ is a scary thing,” he says.
Some house layouts are easier on materials than others. Bielinski has tweaked some designs to eliminate walls, offering a more open layout. It is also starting to offer laminate floors instead of hardwood floors-one example of how costs can be held down by changes in finish materials.
Paying for all this has gotten more complicated, too.
Lenders say construction loans have been hit by the same kinds of credit complications as other types of mortgages.
“If their scores are not optimal, customers are feeling that in the wallet a little bit,” says Doug Gray, a mortgage loan officer with Kenosha, Wis.-based Southport Bank.
Bridge loans, which are used when an owner is building a house while living in the old one, “are significantly more challenging than they used to be,” he adds.
Instead of commissioning a new house and crossing their fingers that the old one will sell quickly, many homeowners are first selling, and then breaking ground.
When it’s finally time to build, expect to review your construction contract with your lender.
“Yes, we do look at the escalation and cost clauses,” says Jeff Cumminford, a vice president and field manager for mortgage lending for Racine, Wis.-based Johnson Bank.
If the cushion in the construction account is consumed by extra costs, “the only solution is to ask the customer to come up with more cash or refinance the construction loan when the project is done, or you make a separate second mortgage or lien of credit to cover the extra cost,” he explains.
Of course, getting the loan to begin with assumes that the market value of the finished house is in line with its new neighborhood.
“Cost is not always equal to value,” says Leslie Sellers, vice president of the Appraisal Institute, based in Chicago.
“You wouldn’t want to build something that’s too customized, or a home that’s twice the size of others in the neighborhood,” he says. “With the market as it is, you won’t get any of that value back.”
You can track material prices by watching the Producer Price Index (PPI), compiled by the Bureau of Labor Statistics. It shows the change in the cost of producing finished goods, excluding food and energy.
© 2008, Milwaukee Journal Sentinel.
Distributed by McClatchy-Tribune Information Services.