When working with a home builder or contractor to build your new home, understanding home builder estimates and overages is critically important. It is impossible to calculate to the penny exactly how much it may cost to build a house, before construction is even started. It is important when contracting a building project to realize that all the numbers you will be dealing with are estimates, unless you have a guaranteed quote, and very few contractors or home builders would offer any sort of exact price when constructing a new home. Here are some facts to help you understand home builder estimates and overages.
Understanding Home Builder Estimates and Overages Fact One: Overage Protection is Built into Most Construction Loans
There are too many variables involved to predict the exact price. For that reason, most construction loans are created with a 10% to 20% overage allowance. This extra money will never be part of the loan unless it is needed. It is simply available in case the project goes over budget. After the house is completed the final price will be converted to a mortgage and any unused money will be returned to the bank without a dime of interest being charged.
Understanding Home Builder Estimates and Overages Fact Two: Home Building Prices are Estimated
How much of a given material is needed must necessarily be estimated. Lumber is estimated by the board foot. Unfortunately lumber comes in specific lengths, and is required in specific lengths. Therefore any excess that is cut off is waste, and this throws off the board feet estimate just a little. Also sometimes there may be damaged or unusable materials, so the contractor will overestimate just a bit to make sure he has ordered enough lumber and other materials. Similarly roofing is sold by the square, so even if you only need five squares plus three shingles, you must still buy six squares of shingles. It is the same with packages of floor tiles, and many other types of building materials. These estimates are very rough and occasionally more materials must be purchased to finish the job.
Understanding Home Builder Estimates and Overages Fact Three: Materials go up in Price During Construction
Though the cost of building materials is fairly static, occasionally cost rises sharply due to unexpected and sudden demand, or shortages of raw materials. If the cost of one or more materials rises then it may impact the overall price of the home significantly.
Understanding Home Builder Estimates and Overages Fact Four: Miscalculations
Sometimes home builders and contractors miscalculate the amount of material needed to do the job. Sometimes roof pitches are especially tricky and takes more plywood to sheet than expected. Occasionally there is some kind of math error which doesn’t get corrected until after the estimate is given.
Understanding Home Builder Estimates and Overages Fact Five: Human Error results in Damaged Materials and/or Extra Labor
Everyone makes mistakes and accidents do happen. Moving new cabinets into a kitchen can scratch a newly laid tile floor, requiring materials to be replaced. The stone mason’s work could prove unstable and have to be redone because the mortar was too thin. There are many times when workmen might take longer than expected to complete a job and yet they are paid by the hour. All these things can make a slight difference in the price.
Understanding Home Builder Estimates and Overages Fact Six: Home Owners Often Change Their Minds on Selections
One of the most common reasons for overages has nothing to do with faulty estimation. Frequently home buyers will change their minds about which materials they prefer, or will make design changes once the project is started. Sometimes these decisions do not impact the cost significantly, but occasionally one or more of the decisions will result in a higher price. Sometimes new home buyers may decide they are dissatisfied with paint, wallpaper or floor covering even after it is applied, and want it ripped out and redone. This can be especially costly because it wastes materials and labor, but if the homeowner is truly unhappy with the materials they must be changed.
Understanding Home Builder Estimates and Overages Fact Seven: Home Owners Decide to Install an Unplanned Luxury Component
Occasionally as the construction progresses, home owners will decide that the new home will not truly be their dream home, without some costly luxury items that were at first cut from the plan because of cost. Sometimes a couple will decide they want a Jacuzzi after all, despite the extra cost. They may decide they want a higher quality of cabinetry or a better countertop. They may elect for a better roofing material, a little stone work on the fireplace, or a more expensive type of siding. These changes may increase the price.
The most important thing to remember about estimates is that they are merely estimates. Home builders and contractors try to keep their estimates as accurate as possible, but the actual price may vary for any number of reasons as I’ve just explained. Allowances are built into the loan to compensate for home builder estimates and overages. I hope this article has been useful in understanding home builder estimates and overages.