Five Common Ways Building Costs Rise and How to Avoid Them

Many people love a good surprise, but that’s not the case when building a home. While building, surprises can make your costs shoot through the roof. Most home builders agree the ideal situation in building is to create a budget, stick to it and finish the project for as little as possible without sacrificing quality. Some first time home builders fail to think ahead and plan for costs of living and maintenance once the house is complete, though. Many will cut corners while building to save money, not realizing that this can lead to paying more while building and later in higher energy bills, repairs, and other maintenance costs.

Gary Ruth, general contractor and owner of The House That Ruth Built, offers five common ways that first time home builders raise their costs without realizing it.

#1 – Hitting Rock During Excavation

Digging may seem like it might be the easiest task to get an estimate and stick to budget on, but that’s not always the case. When building, depending on the community, you may have to dig for the septic system, basement, phone lines and electrical lines, and some areas are prone to rock. If your contractor finds rock while digging, you can guarantee the price for digging is about to go up. The original estimate and contract you signed is no longer valid and new ones are in order.

They can do a sounding or bore to see how deep the rock is and then give you a new estimate. Ruth said that you should make them stick to the new price. After they give you the new estimate, you will need to sign another contract, and you may opt to pay for time and materials or a fixed rate.

“Never sign a contract for time and materials,” he said. “You want a fixed rate.”

#2 – Electric Wiring

People often over wire their houses. Ruth is building a home that has a foot print of 6,000 square feet and could get by with a 200 amp panel, but he has chosen a 400 amp panel instead. It is wired so that it could support 12,000 square feet commercially. They can run up to 160 circuits on the 400 amp panel but are running 68. The smaller panel would have maxed out every outlet in the home. He said it is a big mistake to max out your circuits, because you may decide later that you want to add an outlet somewhere in the house. The extra circuits allow him peace of mind in knowing that he can add whatever he needs later without any problems. He said that spending a little more on the higher amp panel will save money on energy bills for him in the long run.

“When you max out your circuits, it makes your wiring warm,” said Ruth. “It’s basically an ‘energy leak’. You start losing power and paying more because the energy is going to create heat along the wires, instead of making it to your appliances.”

In addition to the dedicated circuits for the stove, washer and other large appliances, he also suggested that builders put dedicated circuits in sections all over the house for other high energy items, so that when they are plugged in, it will not affect the performance of anything else in the house.

#3 – Self Projects

Ruth said that people often try to save money by doing some projects themselves within the house such as flooring.

“That’s fine,” he said. “But make sure you wait to get estimates on other jobs until you’re finished with your projects or schedule them so they won’t interfere with your contractors.”

He went on to say that while you’re working on your own projects, a contractor’s material costs may go up, resulting in a new higher bid, which raises the total cost of building. For example, hurricane Katrina hit and some material prices went up as they became more in demand.

#4 – Change Orders

“Never have big change orders,” said Ruth. “Every time you change your mind while mid-construction, it means your costs are going up.”

A change order is also called a cost over run and, when financing, a bank will only allow a certain percentage of cost over runs. Every change you make increases build time and costs money.

Ruth suggests two ways to avoid this. He said it is imperative to have accurate plans from the start and stick to them. He also said it is best to make sure to see samples before ordering things such as tile, carpeting and paint or signing any contracts.

“Always ask to see samples -even of work the contractors have done in the past. Once you sign a contract, you’ve ordered it,” Ruth said. “It doesn’t matter if you’re happy with the items/work or not. You signed a contract, and if your changes do not increase the value of the house, the banks will not finance it. You’re going to eat the cost.”

#5 – Choosing the Wrong Financing

Another common mistake, some first time home builders fail to shop around for the best financing. Many go to their home bank for their loan needs, but another bank may offer better options.

“If you’re starting from scratch, you may want to look at the possibility of two different kinds of financing,” he said.

If you receive construction financing, you will have an account with the requested amount and make draws from the account. You only pay interest on the loan while building, and the interest is based off of what you’ve drawn rather than the total amount. The interest rates will be higher on this loan than a permanent loan. When the home is completed, your balance will roll over to permanent financing, and you will start paying on the principal amount, but the interest rates will be lower.

“If you can get a construction loan for 5%, do it,” said Ruth. “Kiss them and offer them your first born child.”

It’s not always possible to avoid surprises, such as hitting rock during excavation, but careful planning and self discipline can go a long way in preventing unwanted costs from popping up. By thinking ahead and realizing when it is important to spend a little more, you can save money while building and after moving in. Ruth said that thinking of living, repair and maintenance costs should be as important as thinking of building costs.

“There’s always someone trying to save 50 cents and spending a dollar,” he said.