Pricing a Remodel Project
What actually goes into the cost of a remodel project and how do those costs translate to a price for the customer?
Each estimate I prepare starts with a 15-page Excel spreadsheet that was created over 20 years ago with the help of at least 3 individuals and has been constantly updated since. This spreadsheet includes everything from floor covering material and labor to grout for tile and beyond. We try to account for EVERY out of pocket expense on a project. There are so many things that are required, but a homeowner may never even consider.
Personally, I spend many, many hours on an estimate. Free estimates are never free to a contractor. If done properly, they take a fair amount of time. That time has to then be accounted for in an “overhead” factor that is applied to the project, along with the original time, gas utilized to visit your home, and vehicle maintenance to name just a few. Everything matters if a contractor wants to stay in business and earn a fair return on their investment. As an owner, we invest a lot of unpaid time into our businesses.
Included in all these numbers are labor hours that utilize an hourly rate per employee or subcontractor. Some subcontractor costs are lump sum, as it depends on the trade and our working relationship. The hourly rate for employees is a fully burdened rate…for my non-accountant friends out there, this just means that we include the total cost of having that employee. Employee total cost includes their gross hourly rate plus taxes, health insurance, any additional benefits, cell phone, etc. Since every employee does not cost the same, I have another spreadsheet that calculates an average hourly rate for the entire field staff. Depending on the composition of the staff, the hourly rate may need tweaked before being utilized as the current hourly rate in the estimate template but it tells me exactly what each employee costs per hour. Over the years, that average has risen…as it should. In addition, great employees deserve higher pay and will affect the overall quality of your project. Cheap labor is NOT a good thing for one of your largest investments. This is a major difference between contractors and their pricing…skilled vs unskilled labor.
After every single identifiable cost is added to an estimate, we then add a bit more to account for screws, caulk, tape, and any other type of fastener that is not detailed out in our estimate template because that would be a bit overwhelming to try and calculate. These numbers are based on averages and experience.
Now we are ready to determine the price for the client. This is where many contractors will differ and where so many will fail. There is a considerable difference between the markup percentage on a project and the ultimate profit. I have seen many a contractor who still believe in adding 10-15% for overhead and 10% for profit. The contractor will then end up with virtually nothing to continue in business that way and can probably barely pay themselves a fair wage. Typical markups for reputable contractors can be anywhere from 50% to over 100%. Yes, you read that right…over 100% markup, which is double the actual estimated cost of the project. Having said that, I do not agree with doubling costs on a large project but small projects do require higher markups because they can spin out of control much easier and become less than profitable. Strange, I know.
As a homeowner, I urge you to find a contractor that provides a lump sum fixed price for your project with a detailed set of specifications. This does not mean there will not be change orders, but those changes orders should either be created by you adding to your project, exceeding an allowance, or for items that are somewhat foreseeable and discussed in advance as “possibilities”. It is entirely possible to encounter an “unforeseen” change order, such as for hidden water or termite damage. No contractor can see inside your walls or ceiling and no reputable contractor should just cover something like that back up. We also cannot see if you have multiple layers of flooring that need removed, for example. We can sometimes assume 2 layers based on some visual cues, but more than that is typically a surprise and takes far more time to remove. All changes, unforeseen or otherwise, are the homeowner’s cost to bear. This is why you should always account for at least 10% in unexpected change orders. Reputable contractors do not thrive on unforeseen change orders because all they do is wreak havoc on the planned schedule and add more time to a project just to get it back on track. Reputable contractors will also account for some time and material in the original estimate to handle typical “hidden” items.
Ultimately, pricing a remodel project is as much art as it is science. There is no estimating program out there than can compensate for a lack of construction experience. A contractor’s price is only as good as the person preparing it.
Ultimately, every project is a partnership. The contractor and homeowner have the same goals, so it is important to hire someone that you trust and get along with. Treat each other with respect and even the challenging parts of a project become that much easier. It will be messy, it will be loud, and you will be without water at times. Have faith that the end result will be beautiful!
I hope this helps give you a little insight into one of the most complicated (and convoluted) industries out there. Some days I wish I was just scooping ice cream and asking, “would you like sprinkles on that?” In this business, you have to maintain a sense of humor.
Feel free to ask questions!