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When you build a new home using traditional construction, the final cost actually paid for the home typically exceeds the original contract by 10 to 30%. That’s a big difference! That means if you agree to a contract for $250,000 for your home, you will end up actually paying your builder $275,000 – $325,000 for your home. How does this happen? Where does that money come from? How can you get control of your home building budget? The answer is fairly simple: Plan ahead, stick with original selections, and be decisive. The modular construction process actually helps home buyers better manage their building budgets by requiring so much upfront planning and demanding that decisions be made very early in the process.
What Are Allowances?
This is a term that is commonly used in contracts for construction. However, it is the place where most cost overruns can be traced back to when there is a massive increase in the final cost of a home. In its simplest form an allowance is a dollar amount in a contract that is budgeted for a specific item. For the contractor, he has included this amount for the allowance item in his contract. If the cost of the item goes higher, then the customer has to pay only the amount that the actual cost of the item goes over the allowance. However, if the item costs less than the allowance, then the customer will actually receive a refund for the amount saved.
Allowances are tricky, some contractors can use them to artificially make a customer think they are getting more than they are. For example, an allowance for a granite countertop of $1,500. The granite will actually cost $5,500 but the contractor made his initial price artificially lower. Allowances should only be used when specific prices aren’t known at the time. However, a reasonable estimate needs to be used to create an allowance.
Site Work – The Big Unknown
There are many reasons that costs can exceed budget when you are building. There are things that are just unknown when construction starts. If a builder has to take the risk for covering these items, the contract costs will be artificially high to make sure any unknowns are accounted for. However, to keep the costs lower, clauses and allowances (which remove risk for the builder) are used to mitigate the higher costs. The top three items for job site cost overruns are: excavation (rock or poor soil), wells (depth), and septics (rock).
Most builders won’t build a custom home without something that is commonly called a rock clause. Mother Nature created something called rock. Rock is expensive to remove and no one knows exactly where it is. Builders cover themselves by adding a rock clause to contracts which typically states that if they hit rock, the cost to remove it will be added to the cost of the contract. If you don’t hit rock, no costs. But if you do hit rock, then you could be on the hook for thousands in additional costs.
If you live in a rural area and are required to have a well for your new home, most builders handle that with an allowance. Mother Nature is at work here, too. Is water 100 feet below the surface or 600 feet below the surface? Will the soil require casing for most or all of the well shaft? The builder can’t predict this cost and therefore creates a well allowance. The home buyer pays what it actually costs, but no one knows that cost until the well is dug.
Cost Overruns, the Old Fashioned Way
When a home is built using traditional onsite construction, the opportunity for cost overruns is practically built into the process. Do a Google search for “what is the average cost overrun for building a custom home”. The experts all agree that to be safe, you should budget in a 10-30% cost overrun contingency. That means that if you have a $300,000 home budget you should only start out building a home that costs around $250,000. That sounds insane but it happens every day when building a custom home onsite.
Why you ask? Here are several of the top reasons:
Rush to start building – Building a new custom home is exciting. Seeing your new home being built is a thrill that everyone is impatient to see get started. However, starting before you have all of the details ironed out means you are starting without knowing all the costs. Here comes that word “Allowance”. When you don’t take the time to make all of the decisions upfront, the builder covers that missing decision with an allowance. You many now have dozens of allowances. What happens if you guess low on everyone?
Too many decisions – Building a home requires decisions. Not just one or two or six or eight. It requires hundreds of decisions to be made. For many, that is too many decisions to make at one time. Again, delaying decisions to later in the process means allowances are put in contracts as placeholders. Houzz and HGTV are great resources. However, when building a home, they can be dangerous. Every new item you see, that you just have to have in your new home, means additional and unplanned costs.
Need to see it first – When you don’t do construction or work with plans every day, visualization can be hard. What does a room that is 13’ x 13’ feel like? Is the closet big enough? Will I have enough room for my furniture in this room? When you start building and that building takes place over months and months, you see things you want to change. It’s natural to try and “fix” things that you didn’t understand when you signed the construction contract. Those changes cost money. Lots of changes translates to lots of money… and delays.
Upgrades and Substitutions – Some people find it hard to make decisions. Home building is a process that requires lots of decisions. The more decisions that can be made upfront, before a contract is signed, the better you will be able to stick to your budget. However, when that lack of decision making ability is covered with allowances, the opportunity for cost overruns is at hand. Many products have wide variations in quality and cost: appliances, lighting, flooring, counter tops, tile, etc. The list goes on. Splurging on better items than was planned for with the allowance can add up to tens of thousands of dollars in cost increases for your new home quickly!
Modular Construction Requires More Upfront Planning
Many times customers can become frustrated early on in the process when deciding to use modular construction for their new home. Why? Because they want to get started with building their new home. They don’t understand why they have to make all of these decisions now.
Modular turns home building from a construction process onsite into a manufacturing process offsite. A factory has to design and know exactly what is being built. Plans have to be created and approved, by both the home buyer and the permitting authority. Materials all have to be purchased ahead of time and delivered at the precise time a home’s modules are being built in the factory. The more that can be done in the factory takes advantage of the efficiencies of offsite construction.
While the modular home is being built in a factory, the foundation and other site work is happening simultaneously at the home site. When the modular home arrives, drywall is complete, electrical and plumbing is mostly finished, kitchens and bathrooms are finished, and most other items are substantially complete. All of these decisions had to be made up front. But because of this, the price of the home didn’t change. The requirements of the modular process enforced a discipline that helped the home buyer better manage their home building budget.
The Big Giant Whoosh (or, The Speed of Modular Construction)
Modular limits budget creep by requiring practically all decisions to be make upfront. Many times customers make all of decisions and then wait. They have to wait until the factory builds their home and delivers it. What appears to be a lack of activity early on at their home site when using the modular process becomes a scene of hyper-activity. Some say it feels like a big giant whoosh! The pace of activity can be almost overwhelming.
Modular construction is a great way to build a very custom home quickly. The process enforces a discipline that requires decisions to be made up front. But it is this process that help make modular a better and more cost effective way to build your new custom home!
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