Average Home Builder Commission?

[Nicholas A.]

Hello,

My partner and I are building our first ground up single family home in Horseshoe Bay. We have purchased the land and have signed a contract with a builder. The house is a two bed, two bath, and is 1,490 sqft. My question is this: What is the average commission that a builder charges on a new build (their profit)? Is there a rule of thumb? Is there a certain percentage? I’d like to know so that moving forward we can negotiate better and ensure that we are getting a fair deal. Thanks, Nick

[Mike Smith]

@Nicholas A. That's a good question.  My opinion is pretty close to @Jeremy England and @Bruce Woodruff.  I don't share the opinion of @Scott Mac but there are many builders that do.

There are two different ways to build homes cost structure and thus two different markups.

1. Cost plus - markup is typically between 10% and 20%, as the builder doesn't have the risk of price volatility with materials and labor, or the risk of mistakes in estimating.  It's closer to 10% on very large projects and when the housing market is down.  It's closer to 20% on smaller projects or when the housing market is hot.

2. Fixed price - builders normally estimate in more markup because they are absorbing the risk of rising prices and mistakes in estimating.  The gross markup is closer to 25% on average, but remember builders overhead typically runs between 15-20%, so they are hoping to net profit 5-10%.

I normally always recommend fixed price contracts, otherwise the builder has not incentive to try to reduce material and labor costs.  Cost plus contracts usually only happen for projects that are very difficult to define an accurate specification sheet ahead of time.  For example,  building a 5m cabin in Jackson, Wyoming on a sloped lot.