The key to a successful project is a realistic budget. The Catch-22 is that clients often don’t know how much things cost. That’s understandable because this information can be hard to find and fluctuates. However, clients know how much money they have or can borrow for their project.

It’s essential to define “budget.” When architects and contractors hear the word “budget,” they think of “hard” costs. But you want to be clear that your budget includes “hard” and “soft” costs plus a contingency. Hard costs include labor, materials, and equipment furnished by the contractor and the contractor’s overhead and profit and sales tax. Soft costs can range from 20 to 30% of hard costs. Soft costs can include but aren’t limited to, permits, architect’s fees, engineer’s fees, and surveys. A contingency reserve (10% of hard costs) should also be part of your budget for unforeseen circumstances.

Next, get a rough idea of construction costs in your area. If you’re remodeling, an excellent place to start is Remodeling’s Cost vs. Value Report (www.jlconline.com/cost-vs-value.com). Enter your zip code, and it will estimate construction costs in your area. It also shows cost comparisons between regions. It’s not your imagination; your cousin in Milwaukee did pay a lot less for her kitchen remodel: labor costs are 30-40% more in Coast metro areas than in the Midwest.

Building a new house is more straightforward because there aren’t all the unknowns of a remodel, but you still need a contingency fund. There may be additional costs if the site is undeveloped and needs utilities or is on a steep slope that requires extensive foundations. These expenses are part of the hard costs.

While some clients pay cash for a project, most take out either a construction loan for a new house or a home equity loan for a remodel. It is important to start talking with your bank and your financial planner early in the process. Be aware that a construction loan only covers hard costs, not soft costs. You will need to pay for permits, architect and engineering fees, and survey out-of-pocket.

There are smart ways to reduce costs, but they almost always require adjusting the project scope. This typically means phasing or reducing the size. Cutting back on the quality of finishes does not make a huge dent in construction costs. Architects are trained to be creative, but there are bottom-line construction costs that cannot be designed away.

Ten Ways to Control Project Cost

  1. Start with a reasonable budget. If you are trying to do too much with too little, either quality or your budget will be compromised.
  2. Identify what is most important to you. Know what is not. If you need to cut back somewhere to meet the budget, you know your priorities.
  3. Get a contractor involved early in the design process. No one is more up-to-date on local prices than contractors, and having one look at early drawings can be a reality check.
  4. Adjust the scope of the project if needed to stay on budget. It may mean reducing the size of the project. Sometimes smaller is better, and cutting back on the quality of finishes does not make a huge dent in construction costs.
  5. Allow yourself time during the design process to make decisions. There are a lot of decisions to make during the design process. It’s better to take time to discuss them and think them through rather than rushing to start construction.
  6. Have plumbing fixtures, lighting, tile, etc., selected before construction starts. This will allow accurate price information before any shovels hit the ground.
  7. Prepare detailed plans and specifications for the contractor. The more information the contractor has, the more accurate the pricing.
  8. Consider having a negotiated agreement with the contractor. Rather than padding a bid to cover unknowns or bidding low and then expecting to claw back more money during construction, a negotiated agreement is transparent and fair to all parties involved.
  9. Have a contingency fund to cover unknowns (especially important when remodeling an existing house). Something unpredicted always comes up. It is essential to plan for it by setting aside at least 10% of construction costs.
  10. Try not to make changes after construction starts. Sometimes, it happens, but it’s more cost-effective to have confidence that the decisions you made during the design process were right for you and your family.