Why You Should Share Your Budget with the Right Builder
"What’s your budget for the project?”
It’s the answer most homeowners don’t want to give a contractor . It could also be the first and biggest mistake of your build or remodel.
A common scenario amongst builders we know:
An excited homeowner meets with an Asheville contractor they like or that a friend recommended. They begin to talk about the build or remodel and request an estimate, but when asked about the budget, they are unwilling to share the information or they give a low number to push for the lowest possible price. They enthusiastically share their list of wants for their dream home, not realizing the impact on the budget and not knowing that what they want, doesn’t match the budget they offered… if they offered any number at all.
The contractor and homeowner spend time and money on a detailed estimate that has been guided more by the wants than the budget with unclear or unrealistic guidelines in place and ultimately the homeowner receives an estimate that is 20-30% over what they expected or could afford. The homeowner is heartbroken and angry with contractor for not knowing it would cost that much. The contractor is confused and frustrated for spending a considerable amount of time on an estimate they believed the homeowner wanted, but was never going to meet their financial needs from the start. The build is cancelled and both the homeowner and the contractor miss out on a great home.
We get it, there’s a fear of “showing your hand” financially. You don’t want the contractor to know how much you can actually spend because you fear they’ll take advantage of it. Instead, what it often does is limit the ability of the contractor to give you a good estimate and the scenario above becomes a reality, yet again. We understand that there are bad contractors out there who might take advantage of you, but there are also really good contractors who want to work WITH you to build a house you’re both proud of.
Let’s assume you are working with a GOOD contractor and you’re wanting to build a beautiful home or finish your basement. They ask about your budget range and you get that pang in your chest and say, “we don’t really know because we don’t know how much this is going to cost”. Ok, fair enough, you don’t know how much it’s going to cost, but neither does the contractor, if they are being honest. In contrast, as a homeowner you’re asking the contractor to answer questions about cost without them knowing enough about the budget and selections, which means the relationship is starting off at a disadvantage from both perspectives.
Quite often this is when the cost per square foot question is asked and creates problems for both the contractor and the homeowner because assumptions are made and expectations are created that often fall short of reality. If the contractor gives a C/SF that is too low, you’ll be disappointed when you are significantly over budget either after the detailed estimate is completed or the build is completed and you’re paying way more than you expected. If the contractor gives a C/SF that is too high, you may both be disappointed because you decide not to move forward, causing you to lose a good contractor and the contractor to lose good work.
Don’t ask for a cost per square foot. It’s simply not accurate for construction and is often inversely proportional to the size of the house….smaller house, higher cost per square foot (possible lower overall cost)…bigger house, lower cost per square foot (possible higher overall cost)...and remodels have too many variables to apply a cost per square foot. Way too messy…don’t go there. Please. We’re begging you.
It is so much better to start off with clear, direct communication and take a little time to figure out a legitimate cost. The contractor isn’t asking how much the project is going to cost, they are asking how much you can afford or want to spend, which is something you should know before you reach out to a contractor. If you are holding back on those details, the contractor can’t provide accurate information. It’s the contractor’s job to see if they can fit your needs and wants into the budget you can afford or to let you know that the budget expectations can’t be met.
Side Note: Let’s be honest here, even if it’s not about the contractor taking advantage of your available funds, everyone wants to pay as little as possible for most things. Building or remodeling shouldn’t be one of those things. While you shouldn’t overpay, you should be prepared to pay a realistic price for good materials and labor for the area you’re building in, (Texas and Florida build costs are not the same as Western North Carolina.) If you try to pay the least possible amount, you will absolutely get the same quality in materials and labor.
So how do you overcome this impasse and work together? When is it safe to share your financial expectations?
FIRST and foremost to work together means you both have to start out with a little trust and a lot of communication. As the homeowner, come to the table with as much information as you can offer…the timeline you’d like to meet, examples of finishes you like, photos of the style you’re hoping to achieve, all of your wants and needs and without a doubt the way you plan to finance the project and what you can afford.
We recommend sharing a budget range. The top of your budget range should be the maximum you can afford and you should be clear with your contractor that this is the most you could spend without being in financial or emotional distress. You’ll need to allocate 10-20% of those funds for contingency (and the contractor’s deposit to start construction, if you don’t have additional funds available for that). Your contingency needs to create a comfortable gap between the cost to build and your max budget to cover unexpected costs, materials and labor increases and changes in the scope of work, which happen on every build. Once you have your contingency secured, you know how much of a budget you have left to work with for your wants and needs. Your contractor can help you decide what percentage of your budget should be contingency, based on the complexity of your project.
SECOND Work with a contractor who gives you a detailed estimate before you sign a construction contract. This could be anything from a budget of allowances that you agree to, (please look into these allowances before you agree to them and make sure the lights, plumbing fixtures, tile, etc. you want are within those budgets ) or a detailed home design with selections completed. Check out this planning course if you need some help.
Contractors do typically charge a fee for a detailed estimate (pre-construction) because it takes a significant amount of time and work to complete and the build is not guaranteed. Take a quick look at our estimating process HERE. It’s a really good way for you and the contractor to get to know each other before committing to a construction contract and it gives you a good foundation for the expectations of the build. It is also a very minimal cost to discover that maybe your wants and needs are more than you can afford or want to pay, in comparison to paying for cost overruns at the end of a build. BUT, don’t move forward with this step if your budget expectations aren’t shared with the contractor and/or you aren’t in agreement with the contractors rough estimate.
THIRD Have a discussion about what your expectations are for the type of estimate you’d like to have. Do you want to start with an estimate for all of your needs and a few wants or do you want an all-in estimate with all of your wants that you can edit, if needed? The reason this step is important and worth solidly discussing is…STICKER SHOCK!
An estimate with all of your wants and needs will almost undoubtedly be over your budget, possibly WAY over your budget. We see so many shocked and disappointed faces, when the budget is revealed and we unintentionally become dream killers. Some people have such a difficult time reconsidering their wants vs budget, they end up walking away from the build, often blaming the contractor and forgetting that this was meant to be an estimate to edit down to a workable budget. For these clients a more realistic approach may have gotten them the home they needed and would have been really happy with, but starting out with sticker shock for all their wants was enough to kill the dream.
If you’re ok with an over-budget number that you want to whittle down…go for the big number, but don’t be upset with your contractor when you see the estimate and be ready with a list of your wants that you can live without or delay for a future project.
If it feels like you’d be setting yourself up for disappointment with the all-in estimate, share all of your wants with the contractor so they are aware of them, but have them create an estimate based only on your needs or a few wants that you’d rather not live without. If you have room in your budget after the first estimate review, you can always add some extras or build in a way that would allow you to add them in years to come.
Either way, be honest with yourself about which type of estimate you really need and communicate that clearly with your contractor. Detailing these budget goals sets you up for success with clear guidelines for both of you as you work through the discovery process of your potential build.
FOURTH Consider the contract type. Does the contractor use one of these common contracts; fixed price, cost plus or cost, plus fixed fee? It’s important that you feel like the contract type fits your needs. Do some quick research on contract types and the pros and cons of each.
We use a cost, plus fixed-fee contract because we believe it allows for the most equitable relationship with our homeowners. As the contractor we are not expected to absorb the cost changes in materials and labor that are typical during a build. We also don’t expect our homeowners to pay us additional profit or overhead for those same costs. We may not be able to control market pricing, but we can control our fee to help minimize overages on the original estimate.
We also believe this makes sharing budget goals safer for our homeowners because we aren’t padding costs to cover risk as a fixed price contract might require and we aren’t looking to increase costs of materials and labor during the build to increase our profit, like cost plus contracts often allow. Instead we are working as a team with our homeowners to create a realistic estimate based on what they can actually afford. Sometimes that means we’re all disappointed to discover the numbers just don’t work, but at the bare minimum, we came to an honest answer together. Read more about our contract type HERE.
**A key thing to remember if you are getting estimates from multiple contractors, is that you won’t be able to compare estimates for different contract types.
So the bottom line is, deciding who it’s safe to share your financials goals with, really boils down to who you trust and whether or not you feel good about their estimating processes, communication and contract . No matter what, remember that if you don’t feel comfortable sharing that information with the contractor you’d like to work with, you may not get an accurate estimate that you can work on together and you might miss out on working with a great contractor.