At first glance, the average home building cost per square foot seems extremely high. People who do a lot of home improvement jobs are usually the first ones to question, because they know the cost of materials. The fact is that the materials are about 25-33 percent of the cost of a house. Labor is another 25 to 33 percent of the total cost. The general contractor takes the remaining 33 to 50 percent to cover their overhead, unforeseen excess cost and his profit margin.
Home Builders Profit Margins
Most people are shocked that the home builder is getting one third to one half of the budget. So, is the contractor really raking in a hefty profit? Well, not exactly. Most home builders and contractors are not getting rich, especially by today’s standards. Home builders do not profiteer like some professionals. Most home builders and contractors cannot afford their own health insurance, and have more invested in construction equipment than they do in their own modest houses. You will not find many home builders and contractors living in luxury homes or belonging to country clubs.
What factors keep the average home building costs per square foot high: Equipment
Most home builders and contractors have hundreds of thousands of dollars invested in equipment and tools of the trade. This equipment must not only be paid for, but also maintained and replaced when it wears out. Without basic equipment, such as trucks, scaffolding, tools and grading equipment, your home could not be built. If you were to try to build your own home, you’d need to either buy or rent this equipment, so that money would not be saved if you did the work yourself. As a matter of fact, you’d spend a lot more money getting everything you need to build a home.
What factors keep the average home building costs per square foot high: Insurance
There are a lot of different types of insurance contractors need to carry. They need insurance to cover fire, theft or damage to the site. They especially need insurance to cover their liability, if due to their error something is destroyed on the site. They have to carry comprehensive insurance on each major piece of equipment. They also pay unemployment insurance and workman’s comp. on employees. Some even carry health care insurance on employees, though this is becoming rare due to rising costs.
What factors keep the average home building costs per square foot high: Office rent, office employees and upkeep
Not only do contractors have to pay their work crews, most also have to pay an office staff, hire an accountant, and keep enough to pay for future expenses. Office expenses keep rolling in, even in times of slow business.
What factors keep the average home building costs per square foot high: Unexpected Expenses and Liability
In any home building job there is a certain amount of waste, water damage, costly crew mistakes, work slowdowns due to weather, and other unforeseeable expenses.
What factors keep the average home building costs per square foot high: Company Saving and Operating Capital
No one would want to hire a contractor who didn’t have enough money to repair his own truck when it broke down, or replace a few materials which got damaged without filing an insurance claim, and waiting for the money to come through. Many contractors have had major financial losses because they lacked enough money up front to cover emergencies.
What factors keep the average home building costs per square foot high: Time
While other subcontractors stay on the site for about a month, your general contractor will be there through the entire the job. He works to find the best deals on materials, insures quality, supervises subcontractors, and overseeing every single aspect of the job for between six months and a year.
Building costs are also impacted by the economy. Supply and demand have a great deal to do with the price contractors will take to build a home. Contractors and home builders are cutting costs where they can, and their profit margin is no longer optimal, due to the number of foreclosed homes on the market. It is a great time to strike a deal with a home builder or contractor. Even though they have to maintain overhead, lean economic practices are ruling the day. Average home building cost per square foot in 2011 is lower than they logically should be. Materials have not gone down, but labor and profit margin are lean in the current economy, so it is a great time to build a home.