Thursday, September 1, 2011

Is this a good time to realize your construction project?

Is this a good time to realize a construction project?  Clients have asked us that question frequently, especially over the last 3 years.  We thought it might be helpful to provide some information pertaining to that question.  Instead of referencing abstract indexes and financial analysis, we’ll draw from our own experience and that of our contractors.  We’ll take a look at construction costs, the cost of living, how to choose a contractor and why this is indeed a good time for a construction project, provided that you are prepared for what’s out there! 

Are construction costs really down? While there is always some flux within the costs of building materials, stemming from the supply / demand relationship, we do not see construction costs to be much lower than they were in the summer of 2008.  Several factors might play a part in this, but we believe the cost of living here in Sonoma County is a large factor, as well as the Californian workman’s comp. requirements, which add heavily to a contractor’s overhead.
The cost of living in Sonoma County has gone up, not down.  Inflation is most likely a major factor, distorting the true balance of goods and services versus their financial value.  One only has to reference gas and food prices to realize that the cost of living has not gone down. If the cost of living is not down, but has actually has gone up, and you’re using a local workforce to get your project executed, it won’t take rocket-science to figure out that those bids can’t be lower now than they were when the cost of living was lower. 

While there still is fierce competition between builders, the contractors we have talked to, agree that at least some large variations in bids are simply a matter of “pay now or pay later”. Some bidders will heavily underbid projects to get a foot in the door. Beware of a deal that seems too good to be true – it usually is.  Sometimes that’s out of despair to keep themselves and their sub-contractors busy, sometimes it will simply mean cutting corners during construction and / or a parade of change-orders. They won’t however, make an appearance, until your house is torn wide open and then rains are on their way… 

What we do see, however, across the industry is that profit margins are way down, due to the aforementioned competition in the field.  What does that mean for you?  It means you’re getting a better deal. But remember that your contractor’s leeway is also much less than it used to be. Which is only one of the reasons why we encourage our clients to get multiple preliminary bids after the conclusion of schematic design.  At this point in the design process the scope can still be changed easily (=inexpensively!)  without getting into the complexities of the re-drawing of construction documents.  This is also the time when you as a client get a chance to meet several contractors. You get to review their bid, see how professionally it is put together, how detailed, and how complete. We also recommend you to take a look at some of their projects and talk to previous as well as current clients.  Another, important thing to remember is to not make changes after the construction drawings have been issued to the contractors. Less profit also means less ability to absorb any cost derived from changes. 

Permit fees also play a big role in the costs of projects. This pertains mostly to new construction, although there are increased requirements on renovations as well. Permit fees as structured by the County of Sonoma are a hefty 5% of a new single-family dwelling to be constructed! These fees include, among others, the plan-check fees, affordable housing fee, school fees and a host of smaller permits required and their associated fees.  The County’s overarching goal here seems to be to stifle single-family development.  In our opinion that sort of attitude is commendable when the economy is going at a furious pace. When, however, the building industry is already on its knees, it seems rather questionable to further curb single-family housing growth.   

Lastly, with the adoption of the new Residential Building Code (effective since January 2011), there are extensive requirements for new residential construction. They range from catch-basins to catch all storm-water run-off on site to extensive energy and water-flow calculations and a plethora of items in between.  The feasibility of a projects requires more up-front investigation, and a thorough investigation of what the financial ramifications are. Civil engineers should be consulted early on to evaluate the site-work, which can have a great impact on design and budget. 

Should all of these factors deter you from pursuing the project(s) you have been planning?  We don’t think so.  If you can qualify for a loan, interest rates are still incredibly low. But we do think that you need to be prepared for what’s out there right now.  Your budget needs to accommodate realistic construction cost, plus at least 10% overage.  You might want to hire an architect or designer for them to talk to the building department, talk to their consultants, to find out what’s really at stake with your project, and what the implications are. This is especially true for new construction. Keep in mind that there are no shortcuts in terms of budget or getting plans approved.  Building departments are understaffed and their employees are worried about their job-security, - for good reason. This means they will do an extra good job scrutinizing the projects they’ve got to review. 

In summation, I would say that as long as you’re prepared to meet the market’s financial demands, are willing to do some footwork prior to getting started and you’re not trying to pull a fast one on your contractor or building department, this is a great time to realize a residential project. Why?  Because if  got a realistic budget, do the initial investigation, choose your contractor carefully, you can benefit from getting a good value, a comitted contractor and a beautiful end-result.  Now all you need is a creative architect and designer. Feel free to give us a call for some recommendations…

Please feel free to comment.  Don't be shy to disagree either, as we would love to have some discussion started on this blog!

Thank you