Remodeling cost: The chicken or the egg?

We take several calls each week from homeowners with the same conundrum:  they want to remodel and would like to hire an architect to work on design, but aren’t ready to spend money on a design if they aren’t sure they can afford to build the project.  They ask us what it will cost to build what they have in mind and we tell them we can’t provide an accurate price without a set of plans and specifications.   It’s a Catch-22 that is a bit maddening, but can be overcome with a bit of research and eventually a leap of faith.

Seattle contemporary kitchen

This kitchen is your goal. How do you set a remodeling budget for it?

The first thing to do is create a budget.  Budgets can be set in a number of ways:

Self-imposed  If you know you have an amount over which you do not want to spend, it’s a little more straightforward.  The hard part is making sure you don’t try to include too much scope of work in that budget.  It is fine to decide you will not spend more than $100k.  But if you are trying to fit $150k worth of work in that budget, you will be frustrated.

Bank or loan-imposed  If you are using a construction loan for the project, the lender will set an upper loan limit for the scope of work you are proposing, based on the appraised value of your home once the work is done.  There’s not much you can do about this, other than shop around to different banks.  But this is also a case where the bank will only give you a definitive loan amount once they’ve seen complete architectural plans and specifications.  Preliminary conversations with a loan officer will yield some information, but not always specific information about what you can borrow.

Realtor consultation  While the bank might be willing to lend you more than enough for the project you are considering, you may be concerned about over-building for your neighborhood–i.e. having the nicest home on the block.  Consulting with a Realtor about current market values will help with this consideration and ensure your comfort level about the amount of money you are investing in your home.

Other budget sources  Don’t discount future income sources or other offsets to cost when considering a project.  Maybe the new or remodeled space can help accommodate an elderly family member, or be a rental.  A home office for a business can make for a substantial tax write-off.  New windows, insulation and a 95% efficient furnace might save hundreds of dollars a year in heating bills.  And the federal government is subsidizing up to 1/3 of the cost of solar power installs via direct tax credits.  All of these things are worth considering when setting a budget.

The Higher Math of Remodeling Costs

Now that you’ve set a budget, it’s important to do the calculations that will tell you how much you will have for direct construction costs.  That’s because your budget needs to cover the professional services of not only your contractor, but also the architect and engineer, and other “soft costs” such as permitting fees, power and water, and a contingency fund.

Fees for professionals and actual variances in estimating can vary widely, but a good rule of thumb is that you should deduct the cost of design and permitting from your budget amount and then reduce what’s left by a minimum of 20% to arrive at a goal for construction cost.  If the architect designs to this budget, it is likely to cost 10% more once all materials are selected, and some of the initial surprises are discovered by the plumbers and electricians.  Then you should to start the project with a minimum of 10% contingency to cover the cost of unknowns discovered during construction, overages and inevitable items that you realize you really want or need during construction.   This percentage should be even higher if you have not selected everything at the start of construction, or if you have a home that you already know has already yielded more surprises than you thought possible.

So with a top budget of $100k to spend on a kitchen remodel, take $10k off for design and permitting, and $18k off of the remaining $90k. That leaves an operating design budget of $72k.  What you absolutely don’t want to do is design to your budget limit and have no contingency during construction.

A note here about design and architectural fees: 10% might be a bit too high on a stand-alone project like a kitchen but will definitely be too low on a larger project, such as an addition or whole-house remodel.  Some design professionals bill as a percentage of construction while other bill hourly.  Check with the professional you are hiring about their pricing structure so that you can include that in your calculations.

So how can you get a sense of likely cost before investing in design services?  A site visit by a contractor with a good reputation can be helpful, because we can help identify items or site conditions in your home that can have an impact on costs.

Ballpark costs by overall project and by individual room can also be helpful in defining a range within which the costs are likely to fall.  While this won’t tell you what the project is going to cost, it will tell you what it isn’t going to cost, and that may be enough information to take that leap of faith.

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