Is the lowest bid the right way to pick a home builder?
Published
Summary
No. The Federal Trade Commission's advice for hiring a contractor is not to automatically choose the lowest bidder, and to ask for an explanation when estimates differ a lot. A written estimate should describe the work, the materials, the completion date and the price, so you can tell a cheaper builder from a smaller scope. Check the license with your state or county and ask for proof of insurance before any of that matters.
Start with the license lookup
Licensing rules differ by state, so the lookup depends on where you build. California is a useful example of what a lookup can show. On the Contractors State License Board (CSLB) site you can search a license and see its complaint disclosure. CSLB says the record also shows the contractor's address of record, whether workers' compensation coverage is on file for contractors with employees, and insurance details on the license history page.
California contractors must carry a $25,000 license bond. CSLB warns that the bond "is often not enough" to cover multiple complaints, or a project that costs more than the bond. Next to the price of a new house, that's a thin cushion.
Who to ask about a builder
The FTC suggests starting with recommendations from people you know, then checking with the local Home Builders Association and consumer protection officials for complaints, and searching the company name online with words like "scam," "review" or "complaint." It also says to read reviews with a critical eye.
CSLB's list of reference sources goes past former customers: material suppliers, subcontractors and financial institutions.
Red flags the FTC lists
Some of the tactics the FTC associates with scams show up in the first conversation:
- asking you to get the required building permits yourself
- asking to be paid for everything up front, or accepting only cash
- pushing you to decide on the spot
- steering you to a lender they know
Deposit limits and what a contract has to say are set by state law in some places. The contract article goes through California's rules, and the compare-quotes page lines up estimates item by item.