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| Planning For The Unexpected |
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| By Jim Cooper |
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As a construction consultant, when I prepared a budget for a customer's log home, I included a line labeled "contingency." It usually ranged from 3 to 7 percent of the finished cost of the project. If the budget was tight, as often happens, one of the first candidates for reducing the apparent cost of the home was the contingency. "Why," customers wondered, "is there a large chunk of money in the budget with no apparent use?" I had to convince them that this single line could control the outcome of their entire project.
Because building a log home is usually a once-in-a-lifetime adventure, few people begin the process with a full understanding of the factors that determine the cost of their home. Most begin with some preconceived notions about pricing, often assuming that, like manufactured goods such as appliances or automobiles, the final price of their log home can be set before it is built. Unfortunately, this isn't the case. Even when beginning with a firm contract figure, there are variables that can affect the final cost significantly.
A contingency is an amount included in the budget to cover unexpected costs that can arise during construction. These range from striking rock while digging a foundation to unanticipated labor and material costs. While unexpected costs can creep into anyone's project, those who plan to act as their own general contractor or contribute substantial "sweat equity" are most vulnerable. Here are just some of the factors that make a contingency good insurance when planning your log home.
Probably the most difficult costs to predict involve site work. Clearing, road construction, wells and septic systems and foundations can vary widely from estimated costs because of land conditions that can't be anticipated before construction begins. Virtually every subcontractor who deals with site work has a contract that protects him from absorbing these unexpected expenses. That leaves the home owner to bear the cost. Failure to allow for unexpected site work may mean a pilgrimage to the bank to ask for additional funding.
I once built a road for customers in a remote location. Because they felt that the bids they received were too high, they contracted with me on a "time and materials" basis. Upon starting to clear the roadway, the bulldozer immediately mired in mud that lay beneath solid topsoil. Only by using filter cloth (a fine material that blocks the passage of soil but not water) and numerous loads of large stone were we able to build a solid road. The road cost about twice what the owner planned to pay.
In another situation, the excavator struck solid rock while digging the foundation. This left two options: blasting or using a jackhammer mounted on a back hoe. The cost of blasting would double the cost of the foundation, while the cost of the jackhammer would vary with how long it took. If the rock were soft, it would go quickly, costing only a few thousand dollars. If the rock were not soft and did not fracture easily, the cost would match that of blasting. The rock was not soft.
Because it's impossible to know what's below ground before excavating, the cost of digging in rocky areas remains uncertain until the excavator goes to work. Excavator and foundation contractors almost always include a "rock clause" that releases them from their contract price if rock is encountered. In those situations, work proceeds at an hourly rate.
Many log homes use wells. Since underground water can be a fickle resource, few well drillers will provide a firm price, instead quoting a price per foot and an estimated depth to arrive at an estimated well cost. If the water doesn't cooperate, the cost of the well goes up.
Customers of mine built on land where they already lived in an old farmhouse. Although the farmhouse had a well, the location of the new house and septic system made a new well necessary. Since the new well was within sight of the old, the well driller used the depth of the old well to estimate the cost of the new. Unfortunately the water didn't cooperate. Two dry holes later they finally hit water--at three times the estimated depth. An estimated $3,000 expense became a $7,500 expense--with the
well-driller reducing his price-per-foot charges.
Local building codes often contribute unexpectedly to the overall cost of a project. Owner-builders are especially susceptible because they may not be part of the informal builder grapevine that keeps professionals informed of code changes. Building code changes can mean more tabor or materials expense. Unless the person estimating the house price is aware of prevailing codes and the house is built soon after the estimate, the possibility exists for cost increases due to code changes. People building in southern Florida in the wake of Hurricane Andrew became painfully aware of this as officials quickly rewrote codes to require better roof framing and heavier materials.
In rapidly developing areas, government fees sometimes grow just as rapidly. Since these are usually local fees, there is no simple generalization of what to expect. Once, I went to purchase a building permit on a project only to find that since 1 had prepared the construction estimate, the county had enacted an "impact fee" of over $3,000. Since permits and fees were included in my contract as an allowance, the home owner took on an additional unexpected expense before even starting. Because it's impossible to predict such events, builders who travel over large areas or in areas of rapid growth rarely include firm permit prices in their construction bids.
Weather can affect even the most carefully prepared cost estimate. Prolonged bad weather can delay or interrupt construction while construction interest keeps on accruing. In extreme cases, weather delays may interfere with subcontractor schedules to the point that the home owner must turn to other subs at a higher cost than anticipated.
Material prices in the construction industry change rapidly and vary widely. Sometimes this is to the home owner's advantage but not always. Because of such price fluctuations, subcontracts often include a clause allowing the subcontractor to pass along any material price increases. If the home is being built by professionals on a schedule, price fluctuations may be minor, but if an owner-builder is planning on taking several years to finish a project, some costs may change substantially.
Labor prices vary widely around the country. Labor accounts for almost half of a total project cost, leaving lots of room for last-minute cost variation. A situation commonly encountered occurs when an owner-builder gets bids from subcontractors with a scheduled starting date for construction. Then weather or other variables delay construction until the chosen sub is no longer available when needed. Two alternatives present themselves: either wait for the original sub or switch to another. Both alternatives often lead to unanticipated costs. Owner-builders planning to use friends or relatives as builders or subcontractors at substantially reduced rates should make sure that they will be available when needed. Otherwise project costs could jump.
Home owner selections for finish items frequently cause big cost increases. Often these go unnoticed at first because the individual increases aren't large. Changing chrome faucets to brass, carpet to hardwood and drywall to tongue-and-groove wood paneling may seem minor until the end of the project approaches. That's when all the extras start to accumulate. Unless costs have been monitored closely, the final draw on the construction loan may not cover the remaining bills. Contractors have learned the hard way to collect payment for extras up front rather than risk having their final invoice go unpaid.
Be sure you understand what is included in the allowance and the approximate cost before signing a contract. Some builders or subcontractors may "low ball" their contract price to make a sale. For example, a builder may include allowances of $1,500 for kitchen cabinets and $750 for carpeting. The contract price looks great until you visit a cabinet supplier and find out what $1,500 will buy and until you realize that the carpet allowance must cover 1,000 square feet (meaning the builder has included $6.75 per square yard for carpeting or about half of what a basic carpet will cost). I've talked with a number of builders frustrated at losing sales to "low-ballers." It's especially aggravating to realize that the customer, lulled by a low contract price won't find out what has happened until midway through construction.
Because even contracted prices can contain substantial price variances, it's wise to include a contingency in any budget. Some builder-dealers suggest that home buyers set aside 10 percent of their estimated budget to cover unforeseen costs. I actually add contingencies into individual line items of my budget, using 3 percent for items covered by a subcontract and 7 to 10 percent for items where I'm relying on an estimated value. This creates an overall contingency of 5 to 7 percent.
With turnkey contracts, builders typically include a contingency. This places them at some risk if costs exceed their estimate, although if the house comes in under budget, they wilt benefit. Whether you choose to work with a turnkey contractor, act as your own general contractor or be your own construction crew, make sure there is some provision for unanticipated costs.
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