Going granular on Home Makeover Project Costs
In the previous Blog Post, I explained that the Home Makeover elephant in the room is "Cost" - because cost is the most dominant factor that influences Home Makeovers.
Mostly we regard elephants with awe and we appreciate their dignity and epic stature although they can also be unexpectedly hilarious. But, with their enormous strength, elephants can also cause catastrophic havoc in the wild when they devastate crops and trample villages. And that's not funny at all.
Talking of catastrophes, if you've listened to Episode 1 of my Podcast, Home Makeover Project Secrets, then you've heard the sorry tale of my own House-of-Horrors Home Makeover that went badly wrong.
A particularly ugly part of our story was how a herd of elephants almost derailed our project. Yes, not just one elephant but a whole herd !!
Ok, so it wasn't really a herd of elephants ... my project was in central Europe after all ... but there WAS a whole herd of major cost problems that hit us one after the other. And it felt like we'd been trampled by elephants.
We discovered work-scope that we had not anticipated which meant the budget skyrocketed. The international exchange rate plummeted so even when local costs were stable, the amount we had to pay kept increasing. And then the global financial crisis arrived like an express train. We ran out of cash as our savings ran dry and there was no way we could borrow what we needed to complete the project. We literally hit the wall. All work stopped dead. And our half-wrecked property that looked like a bomb site midway through the demolition, sat silent and uninhabitable. I could literally see no way out.
The information I am sharing through these Blog Posts is aimed at helping you and other Homeowners to avoid ever finding yourself in a similar situation; I want to equip you with the knowledge you need to execute your own Home Makeover projects with confidence so you don't waste time or lose money along the way.
When you run a project, costs arise in two principal ways and on most projects there will be a combination of both.
We'll call these Direct costs and Contractor costs.
Direct costs arise when you buy stuff yourself from a manufacturer, supplier or retailer.
Contractor costs arise when you buy stuff through a contractor - or rather you pay the contractor for stuff the contractor has bought and often assembles, fixes or fits on your behalf. And the contractor in this instance may themselves be a general or main contractor or a sub-contractor or a supplier or manufacturer. As part of the contractor's services they typically add value to the raw materials they purchase for you - like buying the fixtures and fittings for a bathroom - the bath, the pipes, the shower tray, the sliding glass door, the faucets or taps and so on - and then installing them into your new en-suite master bathroom. In doing so, they add their skilled expertise and labour into the project. So contractor costs are likely to be a composite total of various elements.
Typically, anything you buy direct should be cheaper than if you buy if from a contractor. Why? Because the contractor, like any business, should be making a profit working for you and so will add their overheads and profit margin onto the net cost - that is the cost he pays to purchase it before he sells it on to you.
Overheads are costs the contractor incurs as a result of operating a contracting business that need to be recovered but which are not directly attributable to your project. So the contractor seeks to recover those costs from all of the projects they will deliver each year.
Some examples of overheads could be office rental, workshops and storage facilities, vehicles, mobile phone costs, staff - like head office administrative workers and accountants - and so on. The percentage a contractor adds on for overhead is typically based on their anticipated budget for running costs for the year divided by their anticipated turnover. This would mean that if a contractor expected to deliver projects valued at around $ 10,0 million in a year and his overhead forecast was around $ 1,0 million then he might add an overhead markup of 10% to 12%.
Profit is what every business should add onto the gross base cost, including those overheads I've just mentioned. Profits can vary from contractor to contractor and from industry to industry. A busy, highly regarded contractor may be able to charge a profit mark-up of say 25% on their projects while another less successful business may need to add a lower mark-up to remain competitive and to win work.
Often, larger contracting organisations have higher overheads and expect to make higher profits - especially if they are publicly listed businesses. But this isn't always the case. A smaller contractor may have much lower gross overhead cost each year - say $ 150,000 but if his net turnover before overhead is only $ 750,000 then he'll have to add a 20% markup to recover his overhead costs. To compete with the larger company, he might have to add a much lower profit mark-up of only 5 to 10%. But if he is well regarded, delivers exceptional service and is reliable then customers may be willing to pay a higher charge for his improved performance.
It's also worth mentioning that it isn't always cheaper to buy materials direct. In this case, you may have to buy them from a retailer for a higher base cost, whereas the contractor may be able to buy direct from a manufacturer or supplier who doesn't trade direct with end users - the public like you and me. If contractors buy a lot of materials from a particular manufacturer or supplier then they are likely to be able to negotiate discounts not available to smaller customers. This means that even adding overheads and profit, the amount charged by a contractor could be lower than the price you can buy it for.
There are two other costs Homeowners often forget to take into account.
The first is delivery charges. Whenever you compare costs - whether buying direct yourself or from a contractor - remember to make sure the price quoted includes delivery to the location where the materials are required. And that needs to be for delivering and unloading. Depending on what the item is, those costs might be significant.
The second is the cost of your own time. Those of us who love to do things ourselves often fail to consider the cost of our own time which has a real value and the overall time it will take to complete a piece of work. I may be capable of doing all the decorating in my Makeover project instead of employing professional Painters and Decorators. But, unless I am unemployed, and there really is nothing else I could be doing, then my time has a value and that "invisible cost" should be calculated. Especially as it is likely to take me much longer than a team of professionals to do the work - especially if I can only work in the evenings and at weekends.
Comparing how you will procure and deliver different parts of the work, comparing the pros and cons of cost and time, is a regular part of most home makeover projects.
Another type of cost worth making sure you are aware of are the costs that are only indirectly associated with the actual items of work or work elements. Works costs include carpentry, timber, electrical items and electricians, floor tiles, furniture and curtains. But there are other costs that must be taken into account when developing your Budget - these include costs like works insurance which your mortgage or bond-holder might require while the work is being carried out.
Other costs in this category might be professional fees and expenses - like for your Architect or Interior Designer or structural engineer, Planning approval fees, Building Code and Inspection fees, utility connection fees - these are not Overhead costs because they are directly associated to your project but they don't specifically arise because of one work element - they apply to the project as a whole. And they can be paid direct by you as Direct Costs or may be paid on your behalf by the contractor who will then add their overhead and profit markup.
At the very granular level of costs let's take a quick look at two examples of actual work elements.
For the first, I've picked concrete which has various raw materials as ingredients. Concrete is often used for floor and roof slabs, beams and columns. To make concrete, there are three principle components - materials, labour and plant or machinery which may also be referred to as tools or equipment.
There are three main raw materials. These are sand, stone aggregate and cement with of course water which is added during mixing. The labour component is likely to include both unskilled labour doing the bulk of the heavy handling work with a skilled labour element supervising to ensure the correct mix ratio of the raw materials is used and other critical criteria are met. Unskilled labour is typically cheaper than skilled labour but if a particular element uses a lot of unskilled labour then the cost can increase significantly at which point it might be necessary to consider if there is additional or alternative plant or machinery which might be used to reduce the labour costs.
The plant or machinery component is likely to depend on the amount of concrete required. Smaller quantities can be mixed by hand using shovels or spades and wheelbarrows. As the quantity increases, it may be easier and faster to use an on-site concrete mixer. Once the quantity becomes significant and speed of delivery and placing it becomes relevant, then concrete manufactured off site and delivered to site ready-mixed, in a specialised delivery vehicle, is typically the way to go. Hand mixed is usually cheaper than using a cement mixer which is again cheaper than a ready mixed alternative but again scale and time requirements will affect this. Mixing a large quantity on site by hand with lots of labour may actually end up costing more and take way too long.
For the second example, I've picked a new doorway. We'll assume the opening has been made already and so now we want to install a new door. So lets start with the Materials. First, the door. Then the frame and finally the hardware or ironmongery - that includes the handles, the hinges and maybe a lock. In some case you might buy the whole unit - the door, the frame and the hardware from just one specialist manufacturer.
If you are looking for something very unique or very specific for the design or location, you might actually fabricate the door yourself on site but more typically we buy a ready made door. This is likely to mean that we start with the frame - which just needs timber and then paint to finish it. Next, for the door we might buy this from a manufacturer or supplier and there are many different types - like oak, panelled pine, glass and painted external shown in these images.
Similarly there are multiple different types of hardware - brass, stainless steel and other materials in many different shapes and functions - these are also usually procured from manufacturers, suppliers or retailers. The labour required for fitting the new doorway is likely to include a finishing carpenter and a painter or decorator for the frame. The same finishing carpenter will probably also be able to hang the door and fit the hardware. Typically the carpenter and painter / decorator will just use small tools as opposed to major plant or machinery. Of course if this is a major project with say 25 or 50 doors then a forklift or even a crane might be needed to move pallets of doors around the site.
I wanted to use these two examples to demonstrate that there are a lot of decisions to make even at a granular level on Home Makeover Projects and making the right ones is how you save time and money as projects progress.
A last cost to mention - also very real - but not immediately obvious is a risk related cost. This is the cost of making mistakes. When a Homeowner goes shopping to buy materials, like a door, they may not realise that the door needs to achieve a certain fire rating and it will need to be a particular size to fit the new opening. And when buying door handles, hinges and locks there are many things that can go wrong. If homeowners are buying the materials themselves and make any mistakes, then they have to sort out the problems at their own expense. This might mean trying to return the bits to the suppliers which may or may not be possible or at best may incur a restocking charge so only a proportion of the cost is recovered. On the other hand, if a contractor is doing this, the contractor carries these risks. Of course, the risk for a professional contractor should be much lower as they are doing this day-in-day-out and in the even they do make a mistake, they may be able to use and mis-ordered items on other jobs.
The reason I am sharing these perspectives of the process is to make sure you are aware of the process and what can go wrong before it does, so when you decide how you are going to procure your project, you will do so in the least risky way or at least balance the risk.
And so here's a really effective insider strategy - the secret, when you are an amateur or at least less experienced is to save on items with low risk but make sure the contractor carries the risk for more complex items. So a simple example might be that you buy items like a TV and furniture yourself while having your contractor buy complex technical elements with multiple interrelated parts like electrical, plumbing and lighting installations. This way you save the overhead and profit markup on those low-risk items. But avoid the risk on the more complicated work elements.
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