Building a new property is an exciting and rewarding project. The process may be challenging, but it can culminate in something that will transcend generations. Home or building construction takes planning, budgeting, and the hiring of reliable contractors who are experts in their respective fields.
Budgeting is one of the most difficult aspects of building a residential, commercial, or industrial property, as supplies and construction costs can be unpredictable. Here, you must consider factors like preparation, logistics, and communication as these are all essential components of a successful building construction budget.
The Rise in Construction Costs and Real Estate Prices
According to research conducted by the Associated General Contractors of America (AGCA), the cost of various building products has spiked by up to 7.4% due to double-digit increases in commonly used construction materials. From lumber and asphalt to cement and insulation, the cost of essential materials has risen.
What’s worse is that these price hikes come at a time when many construction companies are already dealing with skilled labor shortages and limited flexibility in raising the pricing for their services.
Needless to mention, the rising cost of construction materials and the lack of manpower have had a significant impact on the building construction business. As a result, these challenges lead to a substantial impact on the value of existing buildings as well as new constructions.
In addition to pricing and manpower issues, supply constraints have also been a concern amid the COVID-19 pandemic. Many suppliers reduced their inventory at the outset of the coronavirus health crisis, anticipating a substantial drop in demand due to the ensuing economic turmoil.
How Much do you Approximately Need to Build a New Property?
According to HomeAdvisor.com, the average cost of a new home can fall between $100 and $200 per square foot, but if you’re after bespoke and luxury options, it might cost up to $500 or more per square foot. For example, a house in the United States costs an average of $282,000 to build, with most homeowners spending between $114,000 and $450,000.
About 40% of the total construction expenses account for labor costs, with permits, materials, and decor making up the remainder. Keep in mind that every choice you make—from flooring, fencing, roofing, and walls to nice-to-have features like sustainable design—will determine how much you spend.
You might ask: Is it more affordable to build a home rather than purchase one? The answer is it’s on a case-to-case basis. Ultimately, your budget will depend on your chosen location, the size and design layout of the house, and the quality of the finishes and materials you prefer. High-end construction in cities with high living costs can reach up to $400 per square foot or more.
Components and Variables Involving the Cost of Building a New Property
As mentioned, the cost of building a new property covers a wide range of components, including the property’s site, theme, design, and materials. There’s a lot more to consider, but the following should give you a head start:
- Land development fees
- Foundation costs
- Framing costs
- Ready-made or original designs
- Exterior finish expenses such as siding and roofing
- Plumbing, electrical, and other interior rough-ins
- Interior finishes, including drywall, flooring, cabinets, and countertops
- Lighting and automation
- Final grading and landscaping
- Driveway and deck
Budget Planning and Financing for Building a New Property
A project budget can be planned in a variety of ways, and most often, experience dictates which strategy works best. One of the most common, tried-and-true methods of planning a building budget is to divide expenses into hard and soft costs.
Soft expenses are expenditures on a construction project that are not directly related to its physical construction. Consider these to be any services required before and after construction. Soft costs, also known as intangible expenses, often account for 30% of a building project’s total budget.
Hard costs account for the remaining 70% of a building project’s budget. Hard costs, sometimes known as “brick and mortar” costs, are charges directly tied to the physical construction of a building, road, bridge, or whatever project is in question.
Since hard costs are concrete — actual things with a definite cost — they are usually easier to forecast and control. Soft costs are defined as all other expenses that do not fall into this category. Soft costs are more difficult to predict than hard costs since service fees fluctuate.
Organizing your building budget into these two categories from the get-go allows you to better manage it. You’ll have a clearer understanding of all your expenses in each category, and it’ll be easier to discover any possible charges you may have overlooked.
When you look at your expenditures along the lines of hard vs. soft, your project management team can determine which cost-control techniques to apply or which expenses are less under your control.
Read on to gain an insight on how to budget for the main factors involved in property construction.
Material costs account for the largest amount of most construction budgets. As such, you must carefully scrutinize this department.
As with any other purchase, you get what you paid for. That said, you should obtain the highest-quality products without exceeding your budget. Unlike services, which can expand depending on the scope, materials have set pricing that you can receive from your supplier early on.
Material expenditures can be incurred either for preparing the site or constructing the property. The nature of your project can determine this.
Estimating construction labor expenses is one of the most difficult tasks. It can be hard to tell how many hours workers will need to finish the job. Still, some factors can help you come up with an estimate of how much time you’ll need to, say, let the building’s foundation like concrete cure before placing any structure on it. In such a case, a good rule of thumb is to wait for about 10 days for the concrete to fully set.
Obviously, labor costs are essential for assembling and communicating with the staff to keep the construction production on schedule and within budget. Improving worker productivity is a must if you want to keep your construction project cost-effective.
Keep in mind the true cost of human resources when establishing your budget for labor. That includes hourly wages for both employees and subcontractors, workers’ compensation costs and payroll expenses, and non-productive time and rework.
3. Equipment and Tools
Every property construction project requires various types of tools and equipment, from the most basic to the most advanced. They might be hard or soft costs, depending on how these pieces of equipment and tools are utilized.
The actual construction of the project includes the use of equipment for clearing, grading, filling lots, and paving driveways and parking lots. Specific equipment or tools that you own can be considered capital expenses.
When renting or buying heavy equipment and tools for building projects, always go with a trustworthy equipment supplier. Knowledgeable suppliers will help you select the appropriate tools and equipment, as well as fully identify the associated expenses, upfront.
4. Utilities and Taxes
In general, gas, water, sewer, and electrical installations are all necessary for construction projects. You must secure permits for these utilities. In addition, hookup fees should be incorporated into the overall building construction budget.
It’s also likely that your project will entail paying municipal and state taxes. Construction tax rates vary depending on the scale and kind of construction, with larger construction projects attracting a higher tax rate. You must deal with a certified professional accountant with knowledge in construction finance to ensure that you’re properly accounting for all taxes.
Although you’d want to stick to a fixed budget, estimators provide plenty of room to account for unexpected expenditures. These events could still happen regardless of how well you think you’ve prepared for the construction project, so a contingency budget should always be included in a cost schedule.
A contingency budget is the money set aside to cover any unforeseen costs that may develop once the project is up and running. A contingency fund does not fall under a certain expenditure category. It can be used as an insurance fund to cover any extra charges.
A safe contingency fund should be between 3% and 10% of the total budget of your construction project. Depending on the project’s scope, your contingency fund could be as much as 20% of the total budget.
Have a Smart Financial Plan
Be frugal when building your new property, but don’t go overboard. Whether it’s a new home, office, or building, you’d want it to bring you joy once it’s done. Besides, it’ll represent your personality and ability to plan.
Always keep track of your expenses and work around any overruns early in the construction process to minimize overspending.
It’s critical to keep an eye on the bottom line and stick to your budget during the construction process, but you don’t want to cut corners either. Wrong judgment calls can easily ruin the project you’ve worked so hard for.