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Archive for Budget

Sometimes Going Forward Takes Compromise

People have different reasons for wanting to get something built. Usually, there is a disconnect between what they want to build and what they can afford to build.

Recently a friend was working on a project for a non-profit, where the design committee had stated that the project budget was 20 million dollars.

Monopoly housesThe project was well into designs and the design team had put together a beautiful looking project. The cost of construction was estimated to be about 18.3 million dollars, all in. The team felt great! They had successfully designed a beautiful looking project well within budget, or so they thought.

Then, literally an hour before the team went to present the project to the city board, the donor told the team the donation would be five million, not the budgeted amount.

They asked me to help figure out how they could get the entire project down to five million, so we spent the weekend crunching numbers and whittling away at the project.

That following Monday, we presented the list of suggested cuts which included reducing the square footage of buildings, reducing ceiling heights, re-positioning buildings, combining spaces, and using different materials. It was all budget driven, but the owner was still not at all happy with all the suggested cuts.

Realistically, the owner can get all of the necessary project functions into a project that will cost five million, but taking any project from 18 million down to 5 million, will drastically change the project size, scope, and quality. In the end, it may have changed everything so much that they don’t build anything resembling what they wanted.

The worst part is that now they have a design that they cannot use, have purchased land they may not use, and have spent upwards of one million dollars on everything to date.

In every project, it is of utmost importance that the people responsible for design and those responsible for funding, are on the same page.

In this case, the design committee never wanted to have the donor involved or informed, and had no other relevant donors. They were setting themselves up for a failure and didn’t even know it.

It didn’t have to happen that way. If the design committee really wanted to build something useful, they needed to compromise on the project size, scope and quality. If they couldn’t, they will have wasted a million dollars on a plan they cannot afford to build on property they cannot use.

Top 10 Renovation Mistakes and How to Avoid Them

Renovating your home is almost always a good idea. As we go through life and our families grow and change and as that happens, you can find that your home needs to change with you. That leaves you with a couple choices; renovating, or selling and moving. Renovating is a better choice, because it’s less expensive and causes less disruption to the family, but before you start you’ll want to know the top 10 renovation mistakes and how to avoid them.

If you’re among the millions of people who are afraid of dealing with contractors and getting ripped off, then of course, selling seems easier. But, if you really think about it; it’s more expensive, and a much bigger headache. The realtor can cost 6% off top, there closing and moving expenses, and often you’ll have to renovate a little anyway just to make your place sellable. Then, of course, there is the whole – find a new place, negotiate, close, pack, move, unpack. Holy Cow! My head is spinning, just thinking about it!

I’d much rather renovate, it’s easier; create a little project plan, talk to some contractors, get comparable competitive bids, pick the best bidder, watch them knock it out. Just follow the Construction Conductor action steps.

Most people start projects thinking they’re going to be fast, easy and cheap, only to end up having them become slow, difficult and expensive, because of avoidable mistakes.

Let’s face it; most of us have no idea about how to go about a home renovation project. All we have is a vague idea of what we want when the project is over. If you don’t know what you don’t know, problems are bound to happen, but with Construction Conductor, those problems can be avoided.

Here are the top 10 renovation mistakes and how to avoid them.

  1. Doing it yourself – There are times to do it yourself and times not to. If you don’t know what you are doing, you’re probably going to reduce your home’s value, not increase it. Stick to doing the parts you know how to do correctly and hire an expert to do the rest.
  2. Not creating a budget – Many people start out working on their homes, without any idea of what it’s going to cost them. Then, halfway through the project they either; run out of money leaving them stuck without the project finished, or have to dig deep and find more money. Either way, the contractor is the only winner there. Develop your own budget, so you’ll know what you can afford before getting started.
  3. Being overly frugal – This isn’t the time to try and save money. Every dollar you save by using cheaper materials or cutting corners will cost you in the long run. When you’re project budget gets bigger than you can afford, you’re better off phasing and doing less work, but doing it well. That will add more to your home’s value and your enjoyment of your home.
  4. Choosing the first contractor you talk to – When a contractor comes to talk to you about doing your project, they’re on a job interview. Any of them can look great in that interview; all they have to do is appear to have good rapport, referral and price. Interview several, to find the one you think you can work with the best.
  5. Avoiding government red tape – The average homeowner that starts out to make a change never thinks about getting a building permit or having their work inspected. This can be dangerous, especially if your home experiences a fire or other disaster. If work has been done without a permit, the insurance company can use that as an excuse to avoid paying.
  6. Starting a project before finishing the plan – Unless all you’re doing is painting, you need to fully plan out your project, before starting it. Otherwise, you’re going to end up wasting a lot of time and money, redoing things. Construction work has to be done in a particular order to prevent waste; plan your project before starting so you ensure that you’ve thought of everything.
  7. Buying more material than you need – It’s easy to go to the home improvement center and fill up your pickup with materials. But if you don’t need all those materials, you might have trouble taking them back. Often, materials become damaged on the job, making it impossible to take them back to the lumberyard. Make a material list, based on your plans and only buy what you need.
  8. Making changes midstream – Changes are inevitable in any construction project. Even so, you want to keep them to a minimum. Often, those changes add to the cost of the project by causing things to be done over. A good plan will help eliminate changes.
  9. Not getting change orders – If you’re using a contractor, make sure you sign change orders for everything. Some contractors see changes as an opportunity to boost their profits. Save yourself from a shockingly high bill by documenting every change, along with its cost.
  10. Miscalculating the effect on resale value – A lot of people think that renovating their home will make their home much more valuable. While a lot of projects will add some value to your home, unless you are adding space or improving the quality, you won’t get that much of an increase. Much of what is done as renovation is really to restore the home to its original condition, not to make it more of a home; that doesn’t add to the resale value.

Construction Conductor helps you avoid the top 10 renovation mistakes, work better with contractors, and have a successful project.

 

 

When do you make money on the property flip?

Often, investors tell you that, “In real estate investing you make all your money by buying right!”

The truth is, “Buying Right” is only part of the ‘flipper equation’.

Most property flips need repairs and upgrades as part of working the flip. Even when holding property, eventually repair and maintenance is needed. This makes property flips, a three-step process: Buy, Renovate, and Sell.

If you buy wrong it’s hard – some say impossible – to turn the situation around. There is no question; flipping property starts with the buy. People have a great degree of control over the buy if they are objective and willing to walk away from the deal. The “trick” is to have solid information that makes you confident you are buying right.

The same information helps your reasonably predict, but cannot control, the sell. Selling is always subject to market changes.

You can buy right only to see the profit slip away when the renovation goes over budget, takes too long, or both. It’s easy to understand why going over budget can reduce profit, but a project is on budget, but takes too long and the market changes – taking a dive mid project. That’s what happened to thousands of flippers when the housing bubble burst in 2008.

Each of those conditions are enough to lose some or all of your profit. Both together, will have you deciding between holding and renting in hopes of the market eventually turning around, selling at a loss, or foreclosure.

That’s why controlling the renovation, is the best way to maximize profit. With the right construction management system and tools in place, you can keep competition fair and reasonable, clearly outline expectations, hold people accountable, control costs, maintain a healthy power structure, and provide checks and balances.

And with unbiased and objective support in place, you can easily sort out confusing and / or conflicting information.

With these two things, you can keep your residential and light commercial project on track, profitable and headache free.

How much contingency should you budget for your project?

Contingency is a part of the budget set aside to cover possible project problems.

Generally, contingency is there to cover ‘unknown conditions’ or conditions that could not have reasonably been known.  Unknown conditions are a fact of construction and there is really now way to completely avoid them, contingency prepares you for them.

How much contingency you put in the budget depends on how much you know about the project, the age  and construction of the structure, and what you can find out about what you can’t see. In new-construction, the unknown condition is generally underground.

There are ways to prepare for these problems:
In remodeling projects, the original plans or some selective demolition can help you find out what is behind walls, underneath floors, and above ceilings In pre 1970’s homes and buildings you might have paint and pipe insulation tested to ensure they do not contain lead or asbestos.

In new-construction, you can have the ground scanned with penetrating radar, and have bores dug to test and investigate what’s underground. All “unearthed” information can help lower the contingency, though a discovery may also increase your budget.

So, how much should you include for contingency in your budget?

I’ve heard so called professionals say, “Include 50% more than what you were thinking your project should cost in your budget for contingency”. Those people are basically pulling that out of… somewhere.

Professionally recognized cost estimating books, tell you contingency should be between 5% to 15% country-wide, though there are exceptions.

The amount of contingency a given project needs depends on how complete and thorough the planning process was, and how many changes an owner makes during construction. The best laid plans are often thrown off by changes. When owners create a thorough and complete plan and don’t make changes during construction contingency is rather predictable.

In my book, I include a table for knowing how much contingency the average person needs on the average residential renovation and new construction project. Here is copy of that chart and information on how to read it:

No Information With As-built drawings With Investigation & Testing
New-Construction

15%

N/A

-5%

Renovation

15%

-5%

-5%

 
Example: Renovation, No As-Builts, Investigated and Tested
                         15%                – 0 %                          – 5%                           = 10%
 

The top row is project information, the left column is project type. Start with the second “No Information” column and select the project type row 15%. If you have a renovation project and you have the most recent construction drawings or “As-Built Drawings”, subtract 5%. If you have completed non-destructive, destructive and testing as-needed, subtract 5%. The remaining amount is your estimated contingency.

You can see from the chart and the example that the more information you have on the project the less contingency generally needed. Use this chart on your next project to help you estimate the amount of contingency you need.