Formulating a BudgetThe very first thing you should do when you start thinking about a remodeling or renovation project is to come up with a budget. I implore you to resist the urge to pick up the phone and call sixteen different contractors for estimates and use whatever responses you get to form a budget number. It is in everyone's best interest for you to do your homework first. By wisely determining a preliminary budget you will be able to screen contractors on the phone and schedule fewer visits, saving you a lot of time and aggravation, while wildly increasing the odds of a thrilling remodeling experience. Please check out this article if you would like some perspective on how to initially choose contractors to look at your project. Read on here to learn about some important considerations for your budget and a methodology to establish it.
- a. An event that may occur but that is not likely or intended; a possibility. b. A possibility that must be prepared for; a future emergency.
- The condition of being dependent on chance; uncertainty.
Unfortunately, contingency is term you may not see very often in a residential construction contract. The reasons are simple, I want to win your business and you're going to compare my proposed investement amount to other companies prices. It's tempting to gloss over the concept that during the course of your project we may discover a concealed condition requiring extra funds to correct, let alone increase the project price on the proposal (even though you would get the unused contingency funds back). That way you aren't even more tempted to call that guy you met outside the hardware store with a "will work for food" sign who swears he's a master carpenter who's just a little down on his luck.
The ideal scenario is to have the contingency fund be part of the contract amount and be administered at the contractor's discretion to remedy unforseen repairs that would otherwise hold up progress. This is especially usefull if you're backpacking in Guatemala for a month with no phone or email access when we discover that only 3 out of 8 floor joists are actually connected on both ends. I know that sounds unlikely but if you reference the pictures on the left you'll see a bathroom where only 3 out of 8 floor joists were actually connected on both ends. Care to guess where the clients were?
One other important note regarding contingency funds included in the construction contract: make sure you understand if it is a builder's contingency or owner's contingency before you sign. In a nutshell the funds provided for in a builder's contingency are not returned to you if unused, with an owner's contingency they are.
Whether contingencies are formally accounted for in the construction contract or just something you aware of as a possible cost that will go above and beyond the contract price, they need to be accounted for in your overall budget. 10% to 15% of the project price should be available for contingencies, although specific nature of your project could affect this in either direction.
You will inevitably reach a point where there are fixtures and finishes you would like to own that are pushing you past your ideal budget. In the planning phase it is easier to resist the urge to splurge. You've already started blood pressure medication after finding out how much your kitchen remodel is going to cost and you're making some sacrifices of things you'd really like to have in order to keep the cost down. You shouldn't be alarmed by this phase, your blood pressure will stabilize once you get comfortable with the investment you're making and if you chose your remodeling contractor well it will remain that way until you get the bill for the hand-made Venetian tile for the backsplash after you abandoned your pre-planned notion of doing a simple ceramic subway tile and whimsically decided "Why the hell not, I'm only remodeling this room once!"
I think it's a the responsibility of a good remodeling contractor to remind you when you're blowing your budget allowance. However, after the third or fourth time you've sent me an email showing me the $1500 fixture you'd like, and I remind you we allowed for a $700 fixture based on an actual fixture that costs $700 that adequately fits the description of what you wanted, and you decide on the $1500 fixture, I will give up on your budget too.
Blowing your allowance budget as well as adding small or large changes to the overall scope of the project is what we in the industry affectionately (we don't blame you, we want your project to be awesome too!) refer to as "scope creep".
Nailing Down the BudgetNow that you have some market data on what your project may cost and are familiar with contingencies and the possibility of scope creep, you're armed with the information you need to formulate a budget. Let's outline a process to nail it down.
- Talk to a lender to find out how much equity is available for a home improvement loan or check the current balance in your "Home Improvement Funds" bank account(if only life were so simple). Jot this number down as the "Available Funds" amount. It's not necessarily what you want to spend, it's more of a worst case scenario if there are cost overruns amount.
- Take the amount of available funds and divide it by 1.1 to account for a 10% contingency(or divide by 1.15 for a 15% contingency, etc.) You: "Whoa!...hold on their Owen, why am I not multiplying by .9, or 90% if there is a 10% contingency?" Me: "Because then you would have the wrong number. i.e. 100 x .9 = 90 | 10% of 90 is 9 | 90 + 9 does not equal 100...You just left a cold hard 91¢ laying around uselessly in your bank account that you could have upgraded a single kitchen cabinet handle with." This is your second number, the "my absolute max investment without contingencies included" amount.
- This step is really dependant on your personality. If you're someone who is very self disciplined and simply won't spend more than you've budgeted then you can probably just skip it. If you're like the rest of us, you know...human, you may want to make an accounting here for scope creep. I really think it's a good idea for everyone to have something in here and I could tell you an anecdotal story as to why, however, this article is getting quite long already so I'll try to stay on point. This step is similar to the one above but we're going to use the amount from step 2 divided by 1.05 to 1.20 depending on how much sticktoitaveness you have. This is your third budget number, the "highest proposal I can sign" amount.