It seems to be a big mystery as to how remodelers and custom builders come up with their pricing. I obviously can’t speak to how everyone else does their pricing, but I can address how we do things at Custom Dwellings. What we don’t do is a square foot price. In my opinion, there are so many factors that go into that equation, it is irresponsible to price jobs this way, unless one is building the exact same thing repeatedly. Square foot pricing is only truly useful for specific breakdowns of a project, such as the price of the tile material being installed.
If we don’t price jobs on a square foot basis, how do we do it? When a new project comes across my desk, I open my spreadsheet and get to work. The spreadsheet has over 2 dozen tabs for a variety of topics, such as general job costs (permits, dumpsters, erosion control, etc.), framing, electrical, and so on. Each tab in the spreadsheet has 40-50 line items specific to the subject matter to fill in. The individual line-item prices are constantly being updated to be as accurate as possible. The goal is to keep our clients informed as to realistic cost expectations. We want to share with our clients a number they need to hear, not necessarily what they want to hear. If costs start to get too high, we can attempt to adjust the project scope and specifications as needed, to keep a project viable. As we get closer to a final design, we’ll send the plans and project scope out to vendors and trade partners to bid on as well as hold a ‘bid day’ at the job site to let the contractors see the job conditions firsthand before submitting a bid. With bids in place, we adjust our estimated prices as appropriate.
At this point we have a pretty good idea of what that project should cost us to build. Now I’ll share the dirty little secret of where the rest of the price comes from. We must pay for our office, vehicles, various insurances, employees, etc., also known as overhead. That rate varies year to year and even quarter to quarter, but overhead tends to run somewhere between $.20 and $.25 for every dollar we take in. That is added to our cost, to get to the client’s price. Then, for a fixed price project, since we as a company are assuming all the financial risk, we add another 10-12% contingency to offset any price increases or other small surprises. For a cost-plus contract, since the client is sharing in the financial risk, this doesn’t apply. Then on top of that, we need to make money to still be in business for our one-year check-in, so we add another 5%-10% for profit. When we add all of that together, we come up with the price to present to our client.
Nowhere in the equation does the client’s stated budget come into play. Knowing budgets is critical to determine if a project is feasible and to be able to design towards a budget. The budget in no way determines the price. There isn’t a tab for that in our spreadsheet. If a client tells us they have a $100k budget for a $200k job, the job is still going to cost $200k. If they say they have a $400k budget for a $200k job, the job is still going to cost $200k. Our prices consistently come from a simply complicated formula of what the hard costs are estimated to be, plus enough to cover our overhead and hopefully make a modest profit.
In the future, we’ll discuss how our design fees work and even try to tackle pricing for some different types of projects to give a better idea of what to expect when considering that next renovation or new build project.