I hear the term "builder-grade materials" a lot, but it's not an industry term. There's no official definition for it. When I hear someone say it, they usually mean it in a negative way. They're saying that builder-grade materials are the cheapest and poorest quality possible and are usually lower quality than materials available to the general public.
That's not really the case though.
The difference between a spec home and a custom home
Building on spec
A spec home is built before it's sold, so it's built on the speculation that someone will buy it. That means the builder is guessing at the market and the buyer that will exist when the home is finished.
They'll typically make deals with suppliers on particular materials and appliances, especially if they're buying a certain quantity of identical items. That lowers their overall price per item, which is how the builder can buy things at a lower cost than the public.
Buying in bulk
It's basically a bulk discount, just like you would get going to a warehouse store and buying a giant can of green beans instead of a tiny can at the regular store. The cost per one is lower when you buy in bulk, and the cost per item is lower for the builder. If the builder makes a deal to buy ten ovens, he's going to get a better price than when you buy one.
When building on spec, the builder hedges his bets and won't go too far out on a limb on any given item. Why put in a high-end Viking range if a potential buyer doesn't care about the kitchen as much as they care about the air conditioner? They're going to start with less expensive items and give themselves room to upgrade if negotiations call for it. The same goes for cabinets, countertops, carpet, and everything else in a house.
Building a custom home
When building a custom home, the builder is following the client's lead in terms of selections and budget. Since the house is custom, the builder loses the advantage of getting a volume deal on appliances or other materials.
Because the spec builder is buying at a volume discount, the difference in price from the standard item to the custom item will appear to be more than if you compared the same two items in the store. It makes it look like the builder is putting in something extra cheap, when in reality he's just able to buy that standard item at a much lower price than retail.
When you're working with a custom home builder on the price of a custom home, be sure to prioritize the items that are important to you. Go with custom on those features and let the builder specify the ones that aren't as important to you. If he recommends something you really don't like, you can change it.
But if it's simply a different brand of toilet that flushes exactly the same for half the price, save your money and go with the different brand that the builder recommends. If he can get a deal on a certain make and model, take advantage of it.
Don't worry that it's "builder grade," because there's really no such thing.