Shady Contractors, Beware: The Developer's Guide to Outsmarting Cost Overruns
Whenever I talk with friends who are interested in property development as a personal investment, side-hustle, or career transition objective, two risks are mentioned by all of them: cost overruns and shady contractors. Speaking as someone with more than twenty-five years of experience, those fears are very well founded. We all know that a surefire way to lose your shirt on a project is to run out of money before the property is habitable. So, how can we get smarter about what things actually cost so we can avoid those two big risks? We will be answering that question in a number of different ways, so keep reading.
While there are many ways to estimate project costs, there are more than a few costs incurred by a property renovation investor that happen before or after the actual construction that are not usually included in the project bidding process. Some of these costs include geotechnical reports assessing soil stability, fees for connecting to utilities like water, sewer, and gas, and infrastructure fees contributing to public works like roads and drainage. Ongoing costs to consider include property taxes, which can significantly increase after development due to reassessments, and insurance costs, which are significant if you are acting as your own general contractor. These are another area to keep an eye on. So, your first key takeaway is: carefully research all the fees you will be subject to before you can start construction.
To explain each method for understanding prices, I have built each explanation around a real-world scenario that highlights the benefits and drawbacks of each.
Gathering Estimates On A Small Renovation Project
If you've ever asked for advice about pricing a construction project from a friend or read one of the gazillion books on home renovations, you were probably told to get at least three estimates. Understanding what a project will cost is particularly challenging as every house or building is different. Moreover, the older the structure you are about to repair, the more likely it is that there are hidden issues in the walls that will not be discovered until demolition is complete. Every renovation project is a bespoke project that requires price discovery. The age and condition of the property, along with its geographical location, all impact the price of the project. When you engage with a contractor to give you a bid for the job, they will have to undertake this very same dreaded process. For the contractor giving the estimate, they know they are in competition for a job but at the same time are aware that if they do not have the winning bid, the work they do to estimate the project goes unpaid. And that leads us to our second key takeaway: estimates that have little detail or are far cheaper than the competitors indicate that much more care will need to be taken when signing contracts with these vendors.
This method is great when starting out. If you are doing a small renovation, like a kitchen or bathroom redo, there are likely to be tons of local contractors available to provide bids. If you attempt to estimate costs manually without designs or drawings, you might overlook critical details like the need for plumbing adjustments to relocate fixtures or underestimate the quantity of tiles required for the bathroom. Your initial estimate, based on surface-level observations, will probably fall significantly short of the actual expenses incurred. Our third key takeaway: small projects, especially those without professionally drawn designs, become difficult to accurately project prices for, as many details, like the specification of finishes, are lacking the reference needed for pricing.
Do-It-Yourself While Adding a Backyard Cottage
If you live in one of the many US cities facing a housing shortage, you may have heard about local laws allowing for increased building density or ADUs (additional dwelling units). If you live in one of these cities, you may opt to build a small structure on your property that can accommodate a small studio or 1-bedroom living space. For such a project, you will need professional designs and permits. A project with this level of detail is a good candidate for DIY pricing. Key to the DIY execution is a pricing resource that can be overlaid on top of the architect's designs.
To be clear, this is not for the faint of heart. If you are not fascinated by data and enthralled by problem solving, find another method. That said, if you do choose to take this journey to slay the estimating dragon, you will know and understand your own project and business at a much deeper level.
To execute this strategy, you will need to pull data from the architect's designs like the areas of floors, walls, and ceilings to estimate the cost of materials and finishes by combining it with pricing data. You will essentially be doing the same exercise that a contractor does, but it will give you the highest degree of certainty that you are getting fair and viable bids. Cost estimating reference books even provide tables with location factors to scale estimates based on the price differences by locations, giving you a higher degree of accuracy by incorporating your current labor market factors. Our fourth key takeaway: cost estimating reference books like "Contractor's Pricing Guide: Residential Repair & Remodeling Costs" are an amazing value, providing accurate and timely pricing data for about one hundred dollars.
Project Estimating Vendor for A Large Multi-Family Project
If you have reached the stage of taking on large multi-family renovation or development projects, you are likely to face more stringent requirements and complex operating challenges than with smaller projects. Today's digital workflows provide low-cost software solutions for activities that were previously only available on large 7 or 8 figure projects. Project estimating software, one of those solutions, combines architectural design software data with the data used to produce the Gordian book mentioned above to create an itemized materials and labor cost breakdown. Vendors that provide project estimating use this software to quickly and efficiently produce a highly reliable cost estimate.
The two main drawbacks to using a project estimator are yet another $500 to $1,000 bill, and an accuracy dependent on the completeness of your design documentation. While it may seem like the cost of the estimating is small given the overall size of the project, getting an accurate estimate requires getting all the architect and engineering drawings completed, which means you have already spent 15% of your overall budget. That said, project estimates are a powerful tool that helps you take the power that comes from knowing actual prices away from the contractors whose bids you are trying to evaluate. Our fifth takeaway: the cost of project estimations is made back in more effective contractor selection with price transparency for labor and materials.
For property developers aiming to outsmart cost overruns and navigate the complexities of construction, these actionable insights can make all the difference. Throughout this post, we've covered essential strategies: thoroughly researching pre-construction fees, scrutinizing contractor estimates for red flags, leveraging professional designs for pricing accuracy, embracing DIY cost estimation when appropriate, and utilizing professional estimating services for larger projects. Each approach gives you more control over your budget and more transparency into the real costs you'll face.
Let's not forget our final key takeaway: always establish a contingency reserve, typically 10% of your budget. This crucial buffer absorbs those unforeseen expenses that pop up in every project I've ever seen in my twenty-five years of experience. Without this safety net, even a minor surprise can derail your entire project and put you right back in the danger zone of running out of money before completion.
By adopting these practical strategies, you'll build confidence in your decision-making process and effectively mitigate those two big risks we discussed at the start—cost overruns and shady contractors. What once seemed like daunting challenges can become manageable parts of your development process. Remember, successful developers aren't just lucky—they're prepared with the right information at the right time. So, apply these takeaways to your next project and watch how much smoother the process becomes.
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