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| Avoiding the $20,000 Surprise |
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| By Jim Cooper |
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In magazine articles about log homes, home owners sometimes say,
"It cost a lot more than we anticipated." When they offer
a figure, $20,000 seems to be quite popular. So popular that I've
nicknamed it the $20,000 surprise. The fact that these people are
living in their log home indicates they were able to handle the cost
overrun. But bank repossession records, Realtor's listings and ads
offering unfinished log homes for sale indicate that not everyone is
so fortunate.
How can a house run over budget by $20,000? First, realize that it
probably isn't due to one omission. Most likely the overrun results
from an accumulation of errors and unforeseen circumstances of a few
hundred to a few thousand dollars throughout the project. My own
estimating form identifies 59 cost centers in constructing a log
home, each of which usually contributes over $500 to the finished
house cost. An error of only 5 percent in just a few of the larger
cost centers will add several thousand dollars to the cost of the
project.
Where do overruns come from? A frequent culprit is site preparation
costs. Mr. Excavator agrees to clear and excavate a foundation for
$1,000, assuming he doesn't hit rock (his contract contains a rock
clause that says, "I hit rock and all bets are off; we proceed
at an hourly rate"). To hold costs down, he agrees to simply
topple the trees on Mr. and Mrs. Log Home Buyer's wooded lot and
push them out of the way of construction. For an extra $200 he will
cut the wood into 4-foot sections and stack them. It seems like a
bargain.
So Mr. Excavator performs his expected chores, clearing and neatly
stacking the wood from a dozen medium to large trees. As he
finishes, a problem surfaces in the form of a big pile of stumps. No
one asked Mr. E about stumps, and he assumed the home owners would
handle them. But Mr. and Mrs. LHB hadn't thought that one through.
"I can bury them," Mr. E says, "but when the stumps
rot, the ground will sink where they are buried. It will take a
good-sized pit and will cost around $400. Or, I can haul them away
for $100 a truckload. I figure it will take about four
truckloads." Suddenly, there's a 40 percent cost overrun on
just one of the 59 cost centers in Mr. and Mrs. LHB's dream home.
Meanwhile Mr. Well Driller is grinding away over in a corner of the
lot. He charges by the foot for drilling and casing a well. Based on
the neighbor's wells, which are around 200-feet deep, he estimates a
cost of about $1,500. Sure enough, at 200 feet he hits water flowing
at a half gallon per minute. Providing they don't shower and do
laundry on the same day, avoid flushing toilets more than once a day
and forget about flower beds, the LHBs might manage. Instead they
tell Mr. Well Driller to keep going.
Mr. WD grinds until at 400 feet he comes up with a passable six
gallons per minute. Total cost of the well is $2,600, an overrun of
$1,100 or 73 percent. Two cost centers down and 57 to go.
Uh-oh! Down in the septic area, Mr. Septic Tank has offended Mrs.
LHB. He was ready to install the septic tank when Mrs. LHB spotted
the truck carrying the tank starting to back through the stand of
dwarf dogwoods that was the whole reason she liked the property in
the first place. Mr. ST explains that he can spare the dogwoods but
it means clearing a path through the woods on the far side of the
septic field and temporarily filling the drainage ditch beside the
road, so the tank truck can back into the site. It will require the
backhoe and two laborers about two hours to make the changes. The
dogwoods live, and $250 is added to the septic tank contract.
With three cost centers down, the home buyers are already $1,750
over budget. If this pattern holds, the final costs of the house,
originally budgeted at $135,000 will actually be $169,417. And the
foundation still hasn't been dug!
Even when site work is complete, the potential for cost overruns
continues. Inside the house, changes and miscommunication with
subcontractors can result in added costs.
Take the master bath for example. The home buyers have made only one
plumbing change to their project since they signed the plumber's
subcontract. They changed the standard tub in the master bath to a
whirlpool. Although it's about the size of a lily pond, they got a
deal from the supplier (only $1,800), and they already included that
cost in their budget. But Mr. Plumber points out that his contract
includes a 40-gallon water heater. Unless the home buyers plan to
use their whirlpool as a trout hatchery, they will need either a
larger heater ($100) or a second unit ($250).
Then, there's the well again. The well pump was included in the
plumber's subcontract as an allowance based on a 200foot well. The
deeper well requires a larger pump and twice as much pipe. The
additional cost is $175.
It's a good thing that the plumber showed up before the carpenters
left. Mr. P points out that the whirlpool must sit inside a frame.
Since this adds to the carpenter's subcontract, it will cost an
extra $150 for labor and materials to frame in the whirlpool. Later,
a ceramic tile sub contractor will charge $300 to tile the tub,
turning their bargain into a $2,500 shrine.
At this point, the LHBs are over budget by almost $4,500. They are
unaware of most of this because for most of these costs, they have
simply shaken their heads, swallowed hard and told the subcontractor
to add it to the bill. Most of those bills have yet to arrive, and
the house is a long way from finished.
The Log Home Buyers should have added an amount for such
contingencies to their budget, especially those item sensitive to
cost overruns. As part of their discussion with subcontractors, they
should have asked about common problems than might increase costs
and for some idea of the amount possible. Even so, subcontractors
are often reluctant to discuss specific dollar amounts for potential
overruns because they don't want to be trapped should the problem be
larger than they are anticipating.
In budgeting, remember that most cost overruns are preventable.
Careful planning, clear communication with subcontractors and
constantly monitoring the budget are the surest ways to minimize
chances of receiving a $20,000 surprise when the final bills come
due. |
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