Learning the Lingo of Construction Costs

Learning the Lingo of Construction Costs

Thinking about building? Check out this article on Houzz.com about some of the lingo when looking at Construction Costs. The car anology they use below is a great reminder when you are dealing with ‘cost per square foot’, “…a Honda, BMW and Porsche might be the same size and weigh about the same, but they have very different price tags.”

When you buy a jug of milk or a loaf of bread, the price is clearly marked. Even products that have negotiable prices, like cars and properties, can at least be seen, touched and inspected before you buy them.

But when you tackle a building or remodeling project, pricing is a lot harder to come by. It’s likely your project has never been built in exactly the same size, finishes, circumstances and location you have in mind. That makes your project entirely custom — and that means the price is, too.

Arriving at a cost for a project involves creating plans and specifications, and requires lots of time, thought and shopping. The more detailed the plans are, the more accurate the price.

So how do you get the accuracy you need when you ask about price? Start with an understanding of the process and the lingo.

Estimates. At its core, every price a contractor provides is an estimate — of the labor and materials it will take to complete your project. In residential construction, an “estimate” (also known as a bid) generally is not a firm price.

Estimates and bids are only as accurate as the information they’re based on. For instance, the least accurate estimate would be one based on square-foot pricing, a range of square-foot pricing or a typical cost for projects of that type. The result won’t tell you what it will cost, but it will tell you if your cost expectations are generally in alignment with the likely price.

This level of accuracy also means that you’re likely to get a wide range of estimated costs when you consult with multiple contractors, as each will have a different interpretation of what you have in mind and a different way of creating a ballpark estimate. To use a car analogy: a Honda, BMW and Porsche might be the same size and weigh about the same, but they have very different price tags.
With a floor plan and a general idea of engineering and finishes, a more accurate line item estimate can be created, but it will still be a rough order of magnitude (ROM). That usually entails allowances based on square foot and unit costs, and extrapolation from other projects of similar size. You haven’t selected the tile, so it can’t be priced yet. The ROM is useful in narrowing down and selecting the contractor with whom you want to work, but it still doesn’t tell you exactly what your project will cost.

A floor plan, also known as a schematic design, can be created by an architect, designer, design-build firm or even a homeowner. When you pay for plans, be aware of any contractual restrictions on the use of the drawings if you decide to hire a different firm to complete the plans or build the project.
For the highest level of accuracy in your estimate, engineering must be completed and reflected in a construction plan; all finishes should be selected; and all bids should be secured from all the subcontractors. This final estimate usually has dozens of line items with specific costs for materials, labor and subcontractors, so you can clearly see the source of all the fees and how they add up to the bottom line.

Because this level of estimating takes so much staff time, many contractors will provide this only once they are hired for the project.

When a contractor uses this estimate as a basis for a construction contract, it is usually called a time and materials or cost plus contract. The “plus” in the estimate is a contractor’s markup for overhead (sometimes called a contractor’s fee) that is applied to some or all of the costs of the project.
Bids. The alternative to an estimate is a bid, which means the contractor or subcontractor agrees to complete a specific scope of work for a firm price. If it costs less to finish the work, the contractor makes more money. If it costs more, the contractor could make less profit or even lose money on the job.

A bid typically means you see a bottom-line cost for the project with a payment schedule based on either time or milestones. The price includes a markup that covers the contractor’s overhead, but that is generally not shown as a separate cost. On very large projects, the bid might be accompanied by categorized costs — mechanical, framing, finishes etc. — that also show the contractor’s fee.

For the bid to be meaningful, it needs to be tied to clear specifications and plans — the same documentation you would also look for in a time and materials contract. It would also clearly state any allowances included in the bid. Allowances are dollar amounts allocated for specific finishes — either materials or labor, or both — that have not been selected yet.

Although a bid contract is for a firm price, it is still subject to change orders for any work that varies from what is specified in the plans.
The level of detail required for a bid means that a firm price is usually not possible early in the planning process. The large amount of staff and subcontractors’ time required to complete a bid — particularly on large projects — may also cause some contractors to either charge a fee for providing a bid or decline to bid entirely until they are hired.

Of course, every contractor has different methods and means for providing estimates and bids, and is willing to provide a variety of estimating services either without charge or for a fee. This complicates the process for homeowners, particularly when they are considering a number of contractors, each of whom may have a different policy. But knowing the language and process of estimating helps make the first steps of exploring a project’s cost that much easier.

Tell us: Which method was used to determine your project’s cost, and how accurate was it?

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