Avoid Cost Overruns

Additional costs on remodeling projects often are unavoidable due to the nature of the work and new decisions by customers. But controlling those costs ensures clients can handle their final payment and don’t lose trust in you as bills spiral higher than anticipated.

In many cases, the part of “unexpected costs” that bothers clients most is the “unexpected” half, not the cost. “You have to keep lines of communication open when unexpected conditions arise and be sure the client understands what is happening,” says Pat Frits, bookkeeper at Westhill Inc. in Woodinville, Wash. Frits provides monthly updates to each client explaining the expenses incurred and what is left to complete with the given budget.

Overruns tend to result from several key factors, contractors say. Anticipating these costs and preparing customers for them can prevent overruns from occurring.

Product Allowances
Many estimates provide allowances for key products because specific selections aren’t completed. “Overruns tend to occur because customers make selections that are higher than anticipated,” says Erik Anderson, vice president of Anderson-Moore Builders Inc. in Winston-Salem, N.C.

“Allowances are the primary place where projects get lost and the contractor can get stung,” says Vince Butler, president of Butler Brothers in Clifton, Va. He meets early on with customers to get a sense of what finishes and equipment they want so they can determine an initial budget range. To achieve that, he takes unspoken cues from the client. “We look at which magazines their ideas come from, the value of the home overall and their general taste. Then we’ll tell them that the general level of finish they’re suggesting typically results in a budget of this size,” he adds.

Unexpected Conditions
Sometimes opening a wall provides more surprises than you or the client anticipates. Butler often avoids this problem because the company’s design-build format allows for considerable investigating during the planning phase. This includes bringing in subs to review existing MEP systems and cutting into walls to see what’s there. “We sell our ability to minimize unexpected conditions as an advantage of the design-build system,” Butler says.

Although some areas can be anticipated to some extent, others can be overlooked. Anderson has had customers assure him that they have a recent property survey, but they don’t. “You need to explain documentation needs upfront and that if they don’t have what’s needed, you’ll have to provide it at an additional cost,” he says.

Soil conditions also sometimes can’t be determined fully until work is underway. “If we need to excavate and fill with stone or add footings, it’s going to add to the work, and the customers have to know it right away,” Anderson adds.

Labor Costs
Subcontractor quotes are easy to factor into an estimate, but in-house labor can cost more than expected. Anderson occasionally talks with his field crews to see if he’s allocating enough time to perform each activity, and he tracks where his estimates come in low compared to final time spent, to see if systems need to change or his estimates need to rise.

Material Prices
The volatile nature of lumber prices have made it difficult to reconcile estimates, particularly if the job doesn’t begin (and materials aren’t purchased) for several months after the estimate has been accepted. A price-escalation clause in the contract can resolve those problems. But it comes with some caveats.

“You have to be very, very careful doing it,” Frits says. “The customer might decide that what can escalate also can be decreased, and they’ll ask for rebates.” That’s particularly true as the Internet gives customers more access to pricing, creating a desire for a virtual a la carte menu, in which they supply some products, Butler adds.

“It takes a lot of time to explain a price-escalation clause and to reprice the estimate as material costs rise,” Anderson says. He also questions how the contractor determines at what point the price rise is sufficient to approach the customer with a higher bill. Any one material, even lumber, makes up such a small percentage of the total project that the effort to explain and adjust isn’t worth it, he says.

In most cases, Frits says, regardless of the price-escalating change, the best approach is to let the customer know immediately and work it out. “If you wait until the end to present them with a higher bill, you’ll end up with an angry customer—and that’s the last thing you want,” he says.