Given that understanding and controlling costs is a large and complex subject, I’ll be devoting several separate essays to budgeting and cost considerations. The purpose of this particular essay is to help you develop a framework for understanding the common biases, hidden assumptions and misrepresentations relating to construction costs.
Even before shopping for a piece of land or a builder, you’ll want to have some degree of confidence that your dreams and your financial resources are at least roughly in the same ballpark.
How do you do that? In all likelihood you’ll do web searches, peruse books and magazines, and talk to people – friends, neighbors, and perhaps realtors or contractors. Having practiced as an architect for as long as I have, I can say that there is a lot of misleading, outdated and outright false information out there.
First of all, people on the whole are uniformly embarrassed — yes, truly embarrassed — to talk about how much their house cost – particularly if they had it built themselves. (Existing house purchases, on the other hand, are increasingly a matter of public record, so one has to accept the fact that if your nosy neighbor wants to know how much you spent, they can.)
The problem is that when you build a house, it’s for you. It’s not for the public good. It’s not a sacrifice you’re making to give your kid(s) a better education. An owner’s primary goal in building a house is their own personal happiness. While we hope the house will give us pleasure, we also hope to forget the cost of achieving it, and we hope as well that the neighbors never find out how much we spent (on “ourselves”).
If there is any bragging to be heard about the cost of building a house, rest assured it is about how cheaply it was done. The “hero” is the one who gets the bargain. This one simple fact should make you wary of any information you find concerning the costs of building a house.
If there is any one point I’d like you to remember from this essay, it’s this: Almost without exception in our culture, it is uniformly viewed as desirable to under-represent construction costs.
Consequently, although we are living in the “information age,” magazines increasingly omit the costs of projects altogether. The few publications that do publish figures, almost without exception, are limited to those whose mission it is to demonstrate to the lay public how affordable housing can be “with just a little ingenuity.”
So, think about this. First, for the most part, the only information being reported is at the lower end of the cost spectrum. Secondly, even within that small, skewed pool of projects where cost information is actually disclosed, the information itself is discounted by various forms of omission. Before deconstructing this a bit, let me give you a tangible example of the problem.
Let’s say I’ve come to the end of a sexy photo spread of house porn featuring light-filled interiors, blue-chip furnishings and artwork, and stunning views to the surrounding forest or sunset across an endless land/seascape. In a small block of text giving project data and credits, if we’re lucky, we’ll see project cost, $_____. (If we’re not so lucky, it will say something like “costs withheld” — meaning “We’d be embarrassed if you knew how much we really spent. We hope you enjoyed the photos in blissful ignorance.”) Alternatively, you may really hit the jackpot and find both cost per square foot and overall square footage figures which, when multiplied together, presumably would equal the “project cost.”
Sounds great, right? Not so fast. Well, let me give you some good news first. Within a single information source — say a book or single website with many different houses on display — they will calculate things with some degree of consistency so that projects can be compared to one another.
Now it’s time for the bad news. Remember how I stated earlier that that our culture has a deep-seated bias to under-report costs? Let’s see how that plays out in the above magazine example, starting with the case where a “project cost” is listed.
It may come as a surprise, but everyone can, and largely does, define “project cost” differently and therefore arrive at a different bottom line. If it is in your best interest (say as a publisher) to show a lower figure, you need only use a conveniently narrow definition of what’s in the project. For example, you might not include the cost of permits, surveys, design fees, site preparation and other non-construction expenses. Of course, if you’re an aspiring homebuilder, this practice can lead you far astray. You want to calculate the entirety of your expenses from now to the first night in your new bedroom – not cleverly parse out partial answers as though you had an endless supply of money pots to draw from.
I would encourage you, as an aspiring home-builder, to calculate your project cost as an “all-in” number that includes (but is not necessarily limited to):
— Initial land/site purchase
— Required site surveys/inspections/analysis
— Professional design and engineering fees
— Municipal approval fees (permits, certifications)
— Site preparation, utilities and landscaping
— Building construction
— Specialty systems (wine cellar, pool, greenwall, solar panels, etc.)
— Equipment (e.g., appliances)
— Loose furnishings
— Moving expenses
— and finally, carrying costs: the real estate taxes, insurance, financing charges and utilities costs accrued between site purchase and move-in.
Getting back to our magazine example, in all likelihood, “project cost” to them represents just one item from the preceding list: building construction itself. So if you assume that your definition of “project cost” and that of the magazine are the same, you’re going to be in for a very rude awakening! In reality, if you’re going to try and use the magazine for budgeting, you’ll need to boost their figure with all the other individual line items in your definition of a project cost!
Another important point to make, before I address square footage and cost-per-square-foot figures, is that you need to assess the currency of the information you’re getting. This is probably the second major take-away I’d like to impart to you: Understand that a cost adjustment is needed between the reported cost of someone else’s completed project versus when yours is going to start (or be finished).
Even if you buy a brand-new publication (or pluck something hot off the internet), it’s quite possible, even likely, that the costs presented are one or more years old. Add to that the likelihood that as a significant new project, yours will likely take another year or more to plan and construct.
Although costs can fluctuate wildly with the economy as well as labor or material shortages, on balance, construction costs over the past 50 or so years have increased at a rate of between 2% and 3%, compounding annually. The take-away is that even new project cost information should probably be escalated 5% at the very least to anticipate the differential between historical data and your budget projection. Older data should be further escalated as appropriate for the time differential.
Getting back to our magazine example: Let’s look at reported square footage figures. (Note: For the sake of this essay, I’m only going to consider free-standing, single-family houses – to avoid the further parsing needed for condominiums and various multi-tenant urban conditions.)
What constitutes a square foot to be counted? It starts with any heated/cooled spaces (a.k.a. “conditioned” spaces). But it also includes all partitions and typically extends through to the exterior surfaces of enclosing walls. But what about non-conditioned spaces such as open porches or balconies or raised decks? What about unheated garages? What about a partially finished basement or attic? Depending on the interests of the person or entity making the calculations, these ancillary features outside the primary conditioned house enclosure may be included or excluded.
A realtor or builder generally wants to report houses with lower cost-per-square-foot figures. Therefore, they are more likely to include garages, porches, and other non-conditioned features as part of a house’s square footage. However, a magazine trying to emphasize how space-efficient their featured project is might only count the floor area of conditioned, fully finished living space.
Now, finally, let’s look at construction cost-per-square-foot figures. Remember, as discussed earlier, we’re starting with a cultural bias toward presenting low figures. How does one present low cost figures (without overtly lying)? Again, the answer lies in exclusions, some left unstated. First, It is generally agreed that cost-per-square-foot figures apply literally to the dwelling itself. As such, they do not include any site work or utilities outside the house. Secondly they only include things that are “nailed-down” (e.g. do not include appliances or furnishings).
Furthermore, if the information is from a builder, it may also omit or largely discount expenditures that are discretionary owner choices (often designated as allowances in initial construction bids). For instance, if a builder wishes to impress prospective clients with his cost effectiveness, he would not want to be “penalized” by a prior owner selecting a $100/sq. ft. stone tile mosaic versus someone else settling for a $5/sq. ft. subway tile finish.
Finally, construction square footage figures likely exclude design/engineering fees, costs of municipal permits, inspections and taxes, and subcontracts that owners may have with specialty system providers (such as for sound systems, security systems, wine cellars, etc.).
So, what’s someone just starting to consider building a forever house supposed to do? I’d suggest the following:
1) From the very outset of a project (when you’re trying to decide how viable your dream is) through to project completion (when you’re verifying how you’re going to pay the last invoice), create and maintain a list of all of your prospective project expense categories beyond the actual construction. The numbers will assuredly become more “real” as the project moves forward, but starting out, even an inaccurate placeholder is better than assuming nothing.
2) As you try to assemble cost information for your prospective project, start with the assumption that the figures you’re seeing are biased towards being unrealistically low, both by the source’s narrowed definition of what is “included” in the project, and by elapsed time between your data source and when your project will actually be constructed. Compensate to allow for the fullness of your project, in both scope and time.
3) Seek professional help to augment your internet surfing and coffee-counter chats with friends. Not only will you likely be surprised at how much first-hand information a professional is willing to share, but by how many are willing to undertake an initial meeting at no charge.