How a small splurge may become a big expense (and how to maintain control)

TEMPTATION BY DESIGN

You probably don't realize it, but the same tricks used in grocery stores to entice you to spend more are used in showrooms for construction materials and products.  In a grocery store, the sugary cereal is placed at childrens' eye level to grab their attention (and begin the begging process).  The guilty-pleasure cereals that camouflage as healthier options are at adult eye level.  And, the really healthy stuff?  On the top or very bottom shelf, collecting dust.  

When you walk in a showroom, the most popular luxury goods will be front and center, and you will surely find yourself in "love" with some expensive (and probably trendy) goodies.  

THE LABOR FACTOR

With any construction material, the cost of labor must be included to determine the actual price difference.  Labor rates can sometimes eclipse the unit cost savings.   

Example:

When selecting the backsplash for the kitchen at our Laurelhurst project, we immediately loved the classic look of the 1x3 statuary white marble herringbone pattern mosaic tile.  But, at about $21 per square foot, the material cost was significantly more than a $4 per square foot matte white subway tile we also liked.

So, we came up with two options:

• Option 1- All herringbone mosaic

• Option 2 - Inexpensive white subway tile with matching trim pieces and a narrow accent band of a marble tile

We asked our general contractor to give us a total installed price for both options.  Surprisingly, the additional labor to install the less expensive tile made Option 2 MORE expensive than Option 1.  The labor to install each piece individually, plus additional time to determine the best layout in the field (to minimize small pieces), more than closed the price gap of the materials per square foot.  This would  not have been true if Option 1 also required piece-by-piece installation and fussy layout calculations in the field, but since the herringbone mosaic came mounted on a mesh in 12"x12" interlocking pieces, the labor factor was significantly less.

PURCHASE INCREMENTS AND SUBCONTRACTOR LIABILITY

Some materials have an even larger price difference between the material cost and the total installed cost.  One reason is that some items must be purchased in certain increments, regardless of the amount needed -- such as certain tiles that are sold by the box and stones that are sold in whole slabs.

When fragile or difficult to fabricate materials are being handled and shaped, there will also be a liability factor in the subcontractor's pricing.  After all, if they break the slab, they will have to purchase and fabricate a replacement.  

Example:

Upgrading to manufactured quartz from plastic laminate may seem like a small splurge if you rely upon square foot costs to make your judgment (see the yellow highlighted cells in the spreadsheet, below).  However, once labor, fabrication, and mark-ups are added, the multiplier is much higher (green cells vs. yellow cells, below).  

You may also have to purchase more slabs because of the shapes of un-spliced pieces required that can be cut from a single slab.   In contrast, plastic laminate can be continuously applied to a substrate in much longer pieces, so a purchase increment is less likely to trigger a significant overall price swing.

HOW TO STAY FOCUSED

Appointments are recommended (and required at many showrooms) so that you get individualized attention and answers to your questions, but you will have a true insider's advantage when your architect/designer is either by your side or has called to brief the salesperson regarding the design objectives and budget expectations before your appointment.  

If you find yourself captivated by a more expensive option, collect the information needed to price it, but spend time to find a less expensive option that would also work, keeping labor, purchase increments, and subcontractor liability in mind.

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.)

Register now: Kitchen Remodel 101 class, Aug. 24th @ Dish it up! Ballard

Preview image provided by homeowner.  Other images copyright Kathryn Barnard, 2010.

I will be co-teaching a class about kitchen remodeling with the Urban Kitchen Company at Dish it up! in Ballard on Wednesday, Aug. 24, from 6:00-7:30 pm.  The class is free.  Wine and snacks are provided.  You will learn everything you need to know to be able to make the hundreds of decisions required when remodeling your kitchen (or building a new kitchen).  Space is limited, and pre-registration is required.