It seems that your GC has a handle on it. Is there a reason you don't trust his judgement?

In this time and place with construction costs unknowable and rising all the time... I'm concerned that you're concerned.

There have been more than a few posts in the past couple months about the extraordinary rising prices of lumber and other building materials. It's not only covid, and lockdowns, and people using money to improve their homes they would've otherwise used for vacations...people moving farther from cities...

And, in SoCal, so many homes were burned down in the fires and some are only now entering the re-construction phase... I'm not surprised material costs are out of sight, and good contractors hard to come by.

I'm not an expert, so I hope others will chime in, but if you're worried about scraping by with the absolute minimum, then I'm worried about costs rising and you not being prepared. :(

@notmycircus notmymonkeys

I just have an extreme anxiety disorder. I get easily stressed especially when it comes to money. My husband seems to think everything is fine. I'm just looking for some opinions other than my husband's and GC. It's nice to hear from others.

@Mrs. S

Our GC over estimated on the prices as well as the contingency. I just am feeling worried as I have seen the same things you are speaking of. I just have anxiety and want to hear opinions from those who have had a home build or have some other insights.

@tc9876

My husband, our GC, and mortgage consultant seem to think everything will be fine. I guess my anxiety always makes me think the worst will happen. I just like to hear others opinions.

Prepare for the worst, and if you know you can handle that, then you can realistically hope for the best! Think through worst case now.

My question for you would be, “What DOES happen if prices rise beyond the loan contingency? Or the home fails to meet the appraisal it needs to?“

Both scenarios have been more common than not. Both situations require financial reserves outside the down payment amount and loan both. “Adding a contingency to the loan” is all well and good, until it actually means bringing more cash to the table to close, and there is no cash there to bring.

Face the fear. Can you handle worst case? Create a plan.

@Designer Kitchen and Bath

Honestly I'm having a hard time understanding what happens if we go over our loan amount. That means we have to come in with cash to pay the rest correct? What happens if that money isn't available? We do have some savings, but we will need a lot of it to move and buy the items we need for the house such as a refrigerator and a washer/dryer. Is it possible to have the loan extended afterwards? I'm sorry if I sound stupid. Everyone around me seems to understand what's going on but I'm not great at this part of the home building

We out here have no way of knowing whether the build is possible for you. But, do you think maybe you ought to consider purchasing an existing house? Is this to be your first home? Why take on all the stress and uncertainty?

I don’t think it’s possible to have the loan extended after the fact. Can you increase your contingency in the loan by a greater % fir a bigger cushion?

If you want to have no (well, less) uncertainty ask your builder to bid a "guaranteed maximum price" contract. It will be (perhaps a lot) more expensive because the builder has to assume the risk of changing material prices and unknown contingencies, but you will know exactly what you have to pay. These types of contract are the norm in commercial construction in my experience.

There are lots of variants on guaranteed maximum price contracts, your architect or RE lawyer can help you pick the most appropriate version.

If you have a place to store things - make selections early and buy what you can and store it (tile, appliances, fixtures, etc.) and discuss with your builder how he plans to deal with uncertainty about pricing in wood and copper - i.e. will he buy / lock in all the materials early? Commodity items are the ones escalating, as is labor. lead times on other stuff is extended - but appliances haven't increased in price 100% in the past 12 months.

Custom home? Budget 25% over.

There is something stated a couple times which I am not understanding, the G.C. "over estimate on all materials and services."

The G.C. will give you a bid on the project. Your bank will provide a construction loan for that amount and the bid becomes his contracted payment. If the G.C. over-estimated every line item (like foundation, roofing, HVAC), you are over paying for the project.

However, that total amount will probably include some "intangible" money, like the contingency and some assigned allowances, which may ultimately not be fully paid as part of his total fee amount. If these items are over-estimated, then that is ok.

The contingency is meant for unforseen/unpredictable circumstances that arise: During excavation there's a large rock shelf that has to be either demolished or worked into the foundation, additional $4K beyond the excavator's bid. Or you decide you want a hand-painted backsplash tile that puts you over your given $2K allowance an additional $1.5K. These "extra" amounts can be pulled from the contingency. If none of the contingency is used during the project, then the G.C. does not get that amount appropriated and your final construction cost tally is that much less.

The allowances are estimated amounts the G.C. has assigned for certain choices you will be making. So say $5K for lighting, $20K for cabinets, $10K for flooring. You can choose products that are less than or more than those amounts. So if you choose only $15K worth of cabinets, you just "saved" money and the final construction cost tally is $5K less. But if you choose $25K of cabinets, you need to find another $5K somewhere. You either pull from contingency, the bank increases your loan value (probably not happening), you try to save that amount somewhere else like in flooring, or you provide the cash outside of the bank loan.

A typical contingency is 10%. The current situation with escalating lumber prices is another animal and that is a question that should be asked how the G.C. accounted for that.

NotMyCircus has written a summary that is spot on and my biggest concern when we are ready to build. I'm actually surprised (and comforted) by the fact that we don't hear this issue come up more during the building process (too low of an appraisal).

@sheepla not really, Circus' explanation has to do with the amount the bank is loaning you, not the workings of the contingency during the project which is what the OP is unsure of. When you are at the point of already being approved for the loan and now you are signing on the dotted line, the bank has already done their due diligence that you can afford the total construction cost (which includes the contingency) and the plans/location are being estimated by the underwriters that when finished the final appraisal will confirm their number crunching which already approved the loan to you.

If during the project you have unforseen costs that went so far beyond the contingency funds, or the bottom has dropped out of that location's market as Circus has illustrated, then someone dropped the ball during bidding, underwriting, or the process of design and due diligence.

Hey there, I know this answer is a bit late, but I came across your post and wanted to help calm your anxiety. A 15% contingency is pretty standard for construction loans, and as your GC mentioned, it's unlikely that you'll use the entire amount.