Torron Group Blog

Thursday, September 4, 2014

The Budgeting Process!

The primary purpose of creating a budget is for understanding and controlling the cost of building your dream home.

Knowing your spending limits will go a long way toward keeping you out of financial trouble on your project, especially during the preparation of your plans and specifications. Your first budget estimate will give you an indication of whether or not your plans are feasible or if you will need to make some design changes. Your final "working" budget will be developed when you complete the cost estimating process.

The process of constructing your budget begins with determining how much you can afford to spend on your home. Deciding how much home you can afford isn’t all that difficult; lenders use qualifying formulas to determine how much you can afford to pay each month. The formulas will vary from bank to bank but generally they compare your income to your debt payments.


Qualifying Formula

If you take your monthly payments (house payment, car loan, charge cards, etc. - not utilities, food, entertainment) and divide it by the sum of all your monthly income, the number you come up with should not exceed .33 to .36, depending on the percentage of the cost of the home you are planning to borrow (80%, 90%, 95%?).

Another typical guideline is that the total monthly house payment should not exceed 25% of your stable monthly income.

Once you have determined how much home you can afford to build, there are two things that must be taken into consideration when developing a building budget -- hard costs and soft costs. Hard costs include labor and material needed to build your home. Soft costs consist of everything else.

The budget estimate for hard and soft costs below can be considered to be a study of the cost so the potential homebuilder can determine if the style of home you have chosen is feasible.  For the purpose of determining the feasibility of our project, we are going to do our calculations based of a hard cost estimate of $200,000.00.


CONSTRUCTION BUDGET ESTIMATE BY PERCENTAGE OF HARD COSTS


  (Material and Labor only)
PHASES
NOTES
Excavation
3 %
Full Basement
Structural Concrete
7 %
Footer, Walls, Flatwork
Framing
23 %
Floors, Walls, Sheath, Trusses
Roofing
3 %
3-tab asphalt shingles
Windows
4 %
Vinyl to energy code
Plumbing
5 %
Rough and Finish
Electrical
5 %
Rough and Finish
HVAC
5 %
Rough and Finish
Masonry
1 %
Decorative only
Siding
4 %
Walls and Exterior Trim
Insulation
2 %
Floors, Walls, Ceiling
Drywall
5 %
Hang, Tape, Finish, Texture
Sewer Hook-up
1 %
Ditch and Connectors
Water Hook-up
1 %
Ditch and Connectors
Paint/Stain
2 %
Interior and Exterior
Trim Package
12 %
Cabs, Counter, Doors, Millwork
Garage Doors
1 %
2 Doors with Openers
Floor Coverings
7 %
Vinyl and Carpet
Appliances
4 %
Standard Brand in White
Deck
1 %
Structural and Finish
Storm water
1 %
Gutters, Downspouts, Drains
Exterior Concrete
2 %
Garage Apron and Sidewalk
Final Grade
1 %
Machine and Hand Work
100 %



The soft costs are even more difficult to estimate because they are in proportion to the hard costs. A review of the following items will provide a general guide for what you must take into consideration for soft costs. Assign a cost to these items based on their percentage of the total hard cost estimate.

With a projected hard cost estimate of $200,000.00, your soft costs would increase the project budget by an additional 50% (or $100,000.00). The total cost of your construction project including hard costs and soft costs would be $300,000.00.


CONSTRUCTION BUDGET ESTIMATE BY PERCENTAGE OF SOFT COSTS


1.
All Permits (may differ)
8 %
(depending on your state)
2.
Builder's Overhead and Profit
10 %
(may vary greatly)
3.
Site Survey
1 %
4.
Off-site Utilities
10%
5.
Clean-up and Recycle/Refuse
1 %
6.
State Sales Tax (may differ)
8 %
(depending on your state)
7.
Landscaping
2 %
8.
Architect/Designer's Fee
10 %
(may vary greatly)
50%


Also included in the cost of your home is the builder’s overhead and profit. The following chart will give you an idea of the breakdown of these costs. . The breakdown is based on a 10% fee of the $200,000.00 total hard cost estimate. For example, let's again assume your estimate of total hard costs will be $200,000.00. With Builder's Overhead and Profit at 10% the amount would be $20,000.00.


BUILDER'S OVERHEAD AND PROFIT BREAKDOWN


1.
Phone, Fax, Mail
5%
2.
Outdoor Toilet
5%
3.
Office Equipment, Supplies
5%
4.
Rental Equipment, Tools
5%
5.
Automobile Gas, Maintenance
5%
6.
Temporary Heat, Power
5%
7.
Builder's Bond/Liability Insurance
5%
8.
Miscellaneous Hardware
5%
9.
Job Shack
5%
10.
Overhead Labor
10%
11.
Bid/Negotiations
5%
12.
Superintendent
20%
13.
Profit
20%
100%

The next chart breaks down the Designer’s Fee. This breakdown is based on 10% of the $200,000.00 hard cost estimate.  With Designer’s fees at 10%, that amount would be $20,000.00.


ARCHITECT/DESIGNER'S FEE BREAKDOWN


1.
Schematic Design
15%
2.
Design Development
20%
3.
Contract Documents
40%
4.
Bid/Negotiations
5%
5.
Construction Observation
20%
100%

Based on our budget estimator, to build a $200,000.00 home, you will be looking at a final cost of approximately $340,000.00.

Keep in mind that this Budget is just an approximation. It's a way for you to better understand how money may be proportioned into different categories. Most contractors have their own standards for distributing the cost of all the different categories.
If the cost estimate is more then what you can afford, you should review the budgeting process:

  1. Identify priorities: If you know there is something you absolutely cannot live without, then put that item on your list of priorities.
  2. Recognize trade-offs: If an item on your “must have” list is more expensive than you determined it to be, what you would trade off in order to keep this item. For example, if you really must have imported marble tile in your kitchen, you might sacrifice a second fireplace in the downstairs.
  3. Do a cost/benefit analysis: What are the features you want to add to your family’s life or the appearance of your home? Determine if they are worth the cost.
  4. Revise cost estimates: Take your changes into consideration to determine if your vision for your new home is feasible.

Remember, a budget for a new home is a planning guide! Actual figures will come when the design is finished and a cost estimate is done from the actual labor and materials "takeoff."

Stay tuned for our next blog featuring: “Why we would chose to build in Springfield Commons”!

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