Have you heard of the Pepperoni Price Index? According to Business Insider (April 21, 2025), the sure sign we're about to enter a recession: frozen pizzas.

Whenever there's uncertainty, there's increased demand for premium, high-priced frozen pizzas. It's a bit counterintuitive. You'd think consumers are more cost-conscious, but it's a trade that makes sense, actually. They're replacing eating out with having a good frozen pizza at home.

Consumer behavior is a fascinating science.

It's not just consumer behavior that's been changing; new homes are selling, on average, at 1% lower cost than existing homes. The last time that happened was in 1989. Higher interest rates are causing fewer existing homes to go on the market, and increased new home inventory motivates developers to discount prices and offer more incentives to sell spec houses.

As a result, custom home building remains stable but is not growing rapidly, with its market share decreasing as spec home building rises (NAHB, May 19, 2025).

Are your potential custom home clients behaving differently because of rising interest rates and the unpredictability of fluctuating tariffs? I have a theory that could help your design firm boost conversion rates and navigate these challenges more effectively.

Successful businesses adapt when consumer behavior begins to change. Standard methods include value-size packaging options and flexible payment terms.

Although custom home design has historically been somewhat immune to increased interest rates and mild recessions, volatility in the stock markets does cause hesitation. Tariff threats have certainly caused uncertainty in that arena.

In times of uncertainty, our clients are the kind that look to mitigate risk.

In architecture, we typically seek to secure fixed-fee, or lump-sum, contracts that tie the consumer into the project from design through permitting. That may look risky to our clients.

In uncertain times (and the good times), I rely on two trusted approaches that never fail me.

First, consider the 20-30-50 Proposal approach, as I call it.

The approach breaks down the lump sum into three phases: Design, Design Development, and Construction Documents.

A flexible, tiered approach to home design empowers clients with the freedom to decide whether to move forward at each stage of the project, without feeling fully committed upfront.

Why 20-30-50? I still look at the entire project as a whole. I intend to complete it from start to finish. I present the lump sum as three individualized contracts.

I arbitrarily chose 20% for design, 30% for design development, and 50% for CDs. The key is to keep meticulous notes and track your time on each phase. It's not a hard-and-fast rule. If I'm deriving a design from an existing plan, the percentages may be 10%, 30%, and 70%.

Over time, you'll come up with the percentage breakdown that works best for the way you estimate your COGS (costs of goods sold).

The second option would be a time-and-materials (T&M) style approach. Depending on how you source your labor (direct employees vs. subcontractors), it may be a cost-plus contract.

From the client's point of view, the risk is that they face higher financial risk if costs are not capped or closely monitored. T&M and cost-plus sound open-ended.

To avoid that, as mentioned before, consider the project as a whole, and mitigate by including a "not-to-exceed" clause in the agreement.

The not-to-exceed concept is an excellent opportunity to also introduce a "bonus clause," where you are rewarded a portion of the savings if you come in under budget. Just saying. 😊

Regardless of the approach, a key element is selling the benefit of getting input from builders between tiers.

If the client is surprised by the potential costs, the project can pause between stages in a way that positions you as a knowledgeable and dependable guide, keeping the door open for reviving the project down the road.

Lastly, include clear documentation, defined limits, and regular communication between all parties. In the Designer Docs Library, you'll find editable templates to help you do just that in each of these scenarios.

By empowering your client to make responsible decisions, you’ve positioned them as the hero of their own story. You’ve fostered trust and preserved the relationship, and avoided any awkward encounters the next time you see them around town.

Have a great rest of your week,

Steve Mickley, Executive Director

Email: steve.mickley@AIBD.org​

Let's chat: AIBD.org/meetsteve​

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