The Hidden Costs of Construction (and the Not So Hidden)
Sally and I covered some of the hidden costs of construction in our most recent post about our bathroom renovation. In that post we discussed why you need a contingency budget, which is intended to protect you from two major sources of hidden renovation or construction costs.
- Unforeseen conditions
- Scope creep
There are other hidden costs of construction in a construction budget/estimate, that aren’t so readily obvious. They are all things that no one thinks of during the design process, but are absolutely necessary for a project to be built. They are what we call Indirect Costs and are hidden in plain sight in the construction estimate prepared by your contractor. If you know where to look, they are actually readily identifiable.
Let’s take look at the construction budget estimate prepared for our bathroom renovation prepared by our contractor, Premier Builders, to see if we can identify any of those hidden costs of construction.
|04 DEMOLITION AND TRASH|
|Truck Debris to Dump|
|Frame Materials and Labor|
|Plumbing Labor & Materials|
|Plumbing Fixture Allowance|
|Electrical Labor & Materials|
|Electrical Fixture Allowance|
|Thermal and Sound|
|Blueboard and Plaster|
|Dura Rock Tile Areas|
|32 FINISH CARPENTRY|
|Base Materials Standing and Running Trim|
|46 ACCESSORIES & HARDWARE|
|48 FINAL CLEANING|
|Cleaning by PBI Labor|
|56 CONSTRUCTION MANAGEMENT|
|64 EXTRAS / CHANGES / NOTES|
|Unforeseen conditions, alterations, or deviations from the above estimate will be executed only upon written orders and will become an extra charge over and above the estimate.|
|OVERHEAD & PROFIT MARKUP 20%|
SECTION 02, SET UP:
Two items that should immediately catch your eye are Section 02, Set Up and Section 04, Demolition. Would you think of these as you are working on the deciding of your bathroom or kitchen?
Looking at Section 02, Set Up, we find: obtain a building permit, inspections and sign offs. All required by City and State Ordinances and Building Codes. (Notice the sign offs. Our bathroom is almost complete and we are looking forward to the final sign off.)
We did not need any structural design work, but if we had found any major floor rot other other serious structural rot during demolition we would have, hence the line item in the contractor’s estimate. With crews and materials going in and out of your house during a renovation, site protection is a must! In fact, you can never have too much!
SECTION 04, DEMOLITION AND TRASH:
We all get that there’s going to be demolition. But we forget that all that trash has to go somewhere, right? In our case, demolition was so small, it fit into the back of a dump truck. On other projects, we have had to find a place for a dumpster(s) that would be on site for the duration of a project. (Imagine if you had to rent several parking spots on Commonwealth Ave. from the city of Boston for 9 months!)
The actual build portion of the estimate covering framing, electrical, plumbing, HVAC, sheetrock, finish carpentry, painting, etc. should reflect the contents your construction drawings, schedules and specs, as described in our previous post. These are the costs that most people think of when they talk about a construction budget or estimate.
SECTION 48, FINAL CLEANING:
We gotta have it. You know – remove all tools, equipment, debris from site. Clean all work areas. But do we think of it? No…
SECTION 56, CONSTRUCTION MANAGEMENT/PROJECT MANAGER
This covers on and off site management all trades, scheduling, subcontractor oversight, general labor for job cleanup, deliveries, etc. This is the time required to assure the smooth scheduling and flow of a project that is not directly associated with the actual construction of the project. Each contractor will divide the labor differently between in house staff and staff in the field, depending on how they structure their business.
PERCENTAGE OF BUILD COST
Now that we’ve identified the not so hidden costs of construction in our construction estimate let’s see what they totaled in the original bathroom renovation estimate prepared by Premier Builders. our Build Cost subtotal was $35,975. The sum total of the “hidden costs” in the Build Cost as describe above was $6,605, or 18% of the build cost.
OVERHEAD AND PROFIT: IT’S NOT OVER YET…
Every contractor will add a percentage of the Build Cost called Overhead and Profit. When added together this becomes the Total Project Cost. Usually this is about 20%. In our project, the OH&P was $7,195.00.
It’s not necessarily a hidden cost of construction, but it can take people by surprise. We’ve had clients go off the deep end over this as they erroneously focus on the word, Profit. The contractor is not making 20% profit! Just like a household or any business, there are expenses that need to be covered just to keep the doors open. Expenses such as:
- Insurances – Liability, property, health, disability, vehicle, etc.
- Rent or Mortgage Payment.
- Equipment and maintenance.
- Owner’s Salary.
- IRA’s & 401K’s.
I’m sure there’s more, but you get the idea. At the end of the day, a contractor’s profit target, after expenses, is between 3% and 7%. For our project those percentages translate to between $1,295 and $3,022. A very reasonable number. And at the end of the day, as we’ve occasionally had to explain/point out to our clients, we do want the contractor to be in business at the completion of the project!
So of we throw all of these numbers into the mixing bowl, what percentage of the Total Project Cost was hidden in plain sight.
Hidden Build Costs: $6,605.00
Total Hidden in Plain Sight Costs: $13,800.00
Total Project Cost: $43,170.00
Hidden in Plain Sight/Total Project Cost Percentage: 32%
THE TAKE AWAYS
- There’s more to building out a project than just construction costs.
- The indirect costs (fees, trash removal, clean up, project management, etc.) are necessary in order for project to run smoothly and on schedule.
- “Overhead and Profit” is not all Profit!
- We want our contractor to be in business at the end of the project!
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