Cost Plus Construction Loan to include Lot Price?

[Chase Judd]

I am looking at buying a lot and building new, from the ground up. A home builder owns the land. In his contract to sell, he stipulates that his company will be the builder on a cost plus building fee. He stipulates that the price of the land purchase will be included in the cost plus fee. This doesn't seem fair to me. Am I wrong that this should not be included in his cost plus build price?

[Stuart Udis]

The cost plus should only apply to the hard construction costs, not the land acquisition. When it comes to any 3rd party GC relationship the biggest challenge is alignment of interests. There are a number of ways to approach the relationship but the two general categories you will see are cost plus or GMP/Fixed (some subtle differences between GMP/Fixed but for the purpose of this subject they can be grouped together). I would agree with the advice Chris gave, cost plus leaves you susceptible for pass through of all costs. At the same time, with GMP/Fixed, if the GC is losing margin on the build they can walk off the job or take short cuts to reduce their cost. That's the dilemma and why I say alignment of interests is the biggest challenge in hiring a 3rd party GC. 

If you are going to purchase a parcel where the seller will then build, you should take the time to ensure everything is in order prior to settlement on the land. Make sure all final permits are issued, and the approved plans and specifications are referenced in your construction contract. Again as Chris suggested, avoid a cost plus engagement and ask up front for copies of the subcontract proposals to ensure they tie in accurately to the overall budget. This is a helpful way of confirming the budget is well thought out. Builders will sometimes push back as they don't want you to see your profit margin but the easy way to circumvent the resistance is to explain you will need lien wavers for each subcontractor in order to release the construction funds so you are going to see what each sub is making anyway. It's a good way up front of setting expectations and if they continue to push back then consider it a red flag.