FAQs Budgeting/Cost of Construction
What are Markups?
All businesses need to apply a certain amount of money over the actual costs of delivered goods and services to cover the overhead for the business and a fair and reasonable profit. No two companies have the same overhead demand but it is generally recognized that most construction companies price projects for a profit percentage of about 10%. So, all established companies that truly understand their cost of doing business would take their cost of goods sold (project costs for labor, materials and trade contractors) and add the markup to determine the selling price of the project. Without markup, no company is sustainable and that is exactly what the consumer doesn’t want to happen. If someone is out of business then how will that service related item or warranty request be handled? Pros know what it takes to be sustainable whereas Chuck and a truck is generally clueless and is at constant risk of business failure and not being on the other end of the phone when you need something addressed in the future.
Owner Provided Material/Labor, Can I do it?
Owner–provided material and labor can sometimes help reduce the cost of the job, but it does put more responsibility on the homeowner. Things like installing carpet and painting are good items for a homeowner to undertake themselves. They both happen at the end of the job and won’t hold up the contractor finishing their responsibilities. The homeowner is also in charge of scheduling, paying and monitoring the final product. In the case of homeowner provided materials, it is in the homeowner’s best interest to let the contractor provided the materials and labor to install things that are “in the walls” and that are installed by licensed trade partners, such as plumbing fixtures, can lights, electrical outlets, etc. When installed by the contractor, the product and installation will be warranted by the contractor. If the contractor installs home-owner provided materials and something goes wrong with the materials, the homeowner is responsible for getting the replacement material and paying the contractor to reinstall that item.
Cases where it might be OK to have homeowner provide materials is when items are easily replaced or repaired, such as a stand-alone bathroom vanity or a ceiling mounted light fixture.
How is the cost of a job estimated?
Contractors all have their own systems of estimation, but all will include quotes from subcontractors, material costs and labor costs. Trade partner numbers can also be estimated from historical pricing from recent similar jobs. Labor hours are estimated and multiplied by the hourly labor rate. Material pricing is researched and again perhaps referenced from previous jobs. Professionals use some sort of software or spreadsheets program to track and calculate job costs. When it comes time to develop a detailed quote, the same software is used to enter specific trade partner quotes, client selection costs and labor hours.
Why are allowances in a contract?
Think of allowances as placeholders. They are simply stated values for items like light fixtures or drywall installation that have unknown actual costs at the present time. Allowances permit construction budgets and even contracts to be written with what are generally considered reasonable cost expectations for yet to be selected or specified product or installation. A good rule of thumb is to have few or no allowances by the time a construction contract is executed. Once the actual price for an allowance is known it is always a good idea to have that item documented so all parties agree on the adjusted value.
What are hidden conditions?
Although somewhat rare, hidden conditions in existing homes are not unheard of to encounter. This could be something as simple as a floor joist that was improperly notched but not visible until the ceiling below was removed or it could something as major as a buried cistern in the backyard that affects how a foundation could be placed. All in all, these unknowns are usually rare, not a big deal and represent little extra cost of construction.
What is a fixed price versus a cost-plus contract?
A cost-plus contract is where actual time and materials are tracked and a predetermined multiplier or percentage is added to these costs by the remodelor. On the other hand, a fixed price contract is an agreed upon sum that is charged to complete the project regardless of the individual items paid for by the contractor. Some people see value in cost-plus as a way to minimize contingency costs that might not be incurred. The vast majority of remodeling clients however prefer a known, not to exceed cost of a project so the fixed price contract is always their preference.
Cost/Value Report, What does it mean?
Should I move or improve?
A lot goes into this consideration but generally the cost of any desired or necessary improvements is weighed against the completed value of the remodel versus what might be available elsewhere. Elsewhere could be within the same neighborhood, in a home that is already larger or contains the desired amenities, or a new home to you in another part of town or neighborhood or a new build in a newer subdivision or perhaps even a new build on an existing lot in an established community. Many people are hesitant to dedicate themselves to a move because they love the established neighborhood, often with mature trees and community resources that newer subdivisions often lack. This might include walkable surroundings, better schools and services providing shopping, churches, community centers and access to more transportation choices as well as more desirous roads in which to travel.
What’s an average price per square foot of an addition?
Some builders might ask, “is that the square foot under the SubZero fridge or the square foot out in the garage? Truth is, that’s a great question. Although you find the new construction playing field somewhat leveled by the cost per square foot calculation, that doesn’t always work so well for remodeling. Smaller additions are totally skewed by higher cost/sf values because there are factors such as scale that play into that equation. As an example, small additions need concrete but just a bit. The concrete needs to come by transit truck and the remodeler pays a haul charge or is assessed a minimum amount of concrete they must buy. This inflates the cost of concrete sometimes 2-3 times what a full load would cost for a new home. Another issue with calculating square footage cost in an addition is that there are always factors needing to be addressed in the existing space that cost money to do but might not be directly tied to the cost of the new space. An example might be an electrical service change that benefits the entire home but is triggered by the additional amperage load imposed by the addition. The question then would be, do you add the $2,000 to the addition’s square footage number or do you attribute that to some other category like remodeling costs of existing space? These are just a few examples of why remodeling can’t be sold by the square foot, just like cars aren’t sold by the pound. It is a different set of values starting with the scope of work, the age of the existing home, how intrusive the work will be to the existing, how accessible is the site, what updgrades have been previously completed and how well, and the list can go on and on.