7 Tips to Stay on Budget

1- Start with an honest discussion about your budget.

In my opinion, most projects that go off track were never on track to begin with.  Your very first meeting with your architect and contractor should include a discussion about your budget and what you hope to accomplish.  But, there is more to it than that.  If they don't take the lead in asking you for a deeper understanding of your budget, it is up to you to make the following clear:

  • Do you intend for that budget to pay just the contractor, or to take care of all project-related expenses?

A basic equation for differentiating between the two is Construction Cost + 35% = Project Budget.  Construction Cost (also referred to as "hard cost") is the total amount you pay the general contractor.  The 35% is an estimate for "soft cost" items, including design fees, engineering fees, permit fees, a contingency fund of at least 10% to have on hand for mitigating unforeseen issues that are revealed during construction, and other reimbursable expenses such as prints, copies, parking, etc.

  • When you say "Construction Cost," do you include sales tax in that amount?

Many contractors soften the sticker shock by not adding this to the discussion until later.  You have to make it clear from the beginning that you want all discussions regarding Construction Cost to INCLUDE sales tax.  (In Seattle, the sales tax is 9.5%, so not including it from the get-go puts you nearly 10% off the mark.)

  • Are there other expenses that you assume I will be responsible for directly?

Typically, homeowners will purchase some things directly that may not included in the equation.  The most significant is appliances.  It makes sense to keep this outside the Construction Cost budget, as having the purchase in your name simplifies getting warranty service.  Appliances can range from a few thousand dollars to tens-of-thousands of dollars.

Recessed can lights, exhaust fans, switches, and outlets are typically provided by the electrician (who buys wholesale, in bulk).  The decorative fixtures, though, like chandeliers, pendants, sconces, etc. are often provided by the homeowner.  Prices can range from $15 per bulb to $100+ per bulb, and up.

Cabinet knobs and pulls are often provided by the homeowner.  Prices can range from $2 to $20+ each.

If you need to fit these into your total out-of-pocket, you will want to work with your architect and contractor to establish budgets for those and adjust the equation accordingly.

2- Go with a FIXED PRICE for construction, unless you can tolerate the risk.

Many clients sign up for "cost-plus" pricing with their contractor.  "Cost-plus" is also called "time and materials." It means that you will be charged the actual cost of labor and goods plus a mark-up on the total.  How high can the cost go?  Generally, there is no limit, and it is difficult to get a contractor to agree to a limit.

A great contractor with excellent references will generally come within 10% of their original number.  However, the tracking underestimated labor versus additional work may be somewhat fuzzy.

The sales pitch for "cost-plus" is that if it takes less time/labor, you will save money.  The reality -- in my 17-years-and-counting in this field -- is that it is rare to have that happen.  How rare?  I have seen it happen twice.  TWICE in 17+ years.  If those odds sound good to you, and you are comfortable with the strong possibility that your project will exceed the target by 10% (maybe even more) with a "it took longer" explanation, then go for it.

In my opinion, your best value is achieved by having a solid set of drawings and specifications, a fixed price for that work, and strict tracking of unforeseen and/or additional work.

3- Competitive bidding is necessary, but competitive bidding of general contractors is not always necessary.

There are two approaches to selecting a general contractor:  Pre-selection or selection after competitive bidding by several general contractors.  A common misunderstanding is that you lose the competitive edge when you pre-select a contractor.  But, if you choose the right builder and have an experienced architect on board, there is a way to have the best of both.

When you interview, you need to make it clear that you expect the builder to obtain several bids for each subcontracted portion of the work (plumbing, electrical, paint, drywall, etc.).  That way, the competition is built into their pricing.  If the response is that this is "too much work", move on to another candidate.  You should not promise to hire a contractor who isn't willing to put in the work to get you the best value for your dollar.  Also, if the response is "I only work with one" you can advise the contractor that your architect will review the subcontractors' prices and request competitive bids if any seem to be out of line.  If they are not receptive, move on.

4- Build in options, but start with basics.

Inevitably, there will be a dazzling tile, fantastic appliance, or other splurges that you are excited about.  Chances are that with a reasonable budget, at least one of those may fit.  into it.  The easiest way to facilitate decision-making is to analyze additions the bottom line, after your basics have already been defined. Asking for a few options to be priced is reasonable, but limit your base price to the most cost-effective options.  That way, your base price can be assumed the "wouldn't-be-less-than" number, and you won't go crazy trying to figure out what to change to reduce the cost.

5- Negotiate the fee upfront.

Contractors in Seattle charge anywhere from 10-18% for their "Profit & Overhead".  When you interview, ask what their P&O fee is.  If it is high, ask if they are negotiable.

6- Time, Quality, Price:  Pick two.

This is an age-old truth.  There are three factors, and you must pick only two to optimize.  You cannot optimize all three.  Want it done fast and top quality?  You will pay a higher price.  Want top quality for a value-driven price?  You will have to be flexible with your timeline.  Want it on your schedule and for a low price?  Quality will suffer.

The most common approach to negotiating a lower fee is to be flexible with your schedule.

7- Be nice.

Flattery and thanks will get you everywhere.  Your team takes pride in their work, and the ultimate satisfaction is seeing happy homeowners enjoy their home for years to come. Remodeling is stressful, and your team should make it as enjoyable as possible.

Hire someone you feel you can talk to, and make them feel appreciated.  It is human nature that feeling valued is motivation to work harder.

(It is helpful to know that you will be on an emotional roller coaster.  This graphic is a lighthearted way to put it in perspective.  Sometimes, just knowing that it is normal to be feeling a certain way at a point in the process is enough to take the edge off.)