To Renovate, or Not to Renovate Part 2

After completing the initial analysis of a building targeted for renovation, a good next step will be arriving at an accurate construction budget. Determining whether or not the project is financially feasible is key to a renovation project. An accurate renovation budget will allow you to make the best business decision regarding whether or not to proceed with the project or move on to another site.

As I’ve noted in other posts, a construction budget is often used to determine loan amounts and also to project debt service for future business budgets. How do you get an accurate budget you can count on for future business planning? The easiest and most surefire way is to engage a contractor with an extensive track record in renovation projects. If you are not totally familiar with a contractor’s background, ask the contractor to list several projects similar in nature to yours. You can then visit these projects and get a feel for the contractor’s work. You can also ask the owners or occupants of these buildings about the contractor and what they experienced on their project.

These contractors have experience with many different types of structures and will have knowledge as to what alterations a building can or can’t sustain. They know how to deal with structural and environmental issues and they will have the ability to factor building code upgrades into the budget. An experienced renovation contractor will also have extensive knowledge in Life Safety Code issues that can be tricky with older buildings. They will be more familiar with the various details needed to create an accurate, all-inclusive budget—a budget you can take to the bank with confidence. 

What does it cost to have renovation budgets prepared? It depends on your intentions regarding the selection of the contractor. Some owners wish to keep their options wide open and not feel obligated to the contractor who prepared the budget. If that is the case, ask the contractor for a proposal to prepare a budget. For most projects, it should cost no more than a few thousand dollars to prepare a budget. Most often, owners work with both a contractor and a design firm in order to prepare a construction budget and a design concept. If the project moves forward, the team has been selected and is ready to move forward. In these cases, we consider the budgeting provided as a value added service to our clients. There is no charge for our budgeting service as we know we’re assisting a potential client to help make a project happen.

I have been involved in renovation projects where the owner has requested prospective budgets from two or three contractors. Often there can be wide range in budgeted cost from one contractor to the other. Why is this? Contractors make a large amount of assumptions in preparing a budget, which can vary from one contractor to another. One contractor may be more conservative in his budget approach, preferring to give you a larger number that he feels comfortable will cover the cost of a project in effort to avoid surprises down the road. Other contractors will view budgeting as a semi-bidding process, and try to come up with a lower budgeted cost so their services seem more attractive to the owner.

As an owner, how do you narrow down a wide range of budget numbers to find the “right one”? Do the same thing you should do even if you’re only considering one construction budget; Compare your budget cost against historical cost for similar projects. If your contractor has extensive renovation experience, he will have done this before his budget presentation. Otherwise, your design professional can provide information to help you make this determination.

Perhaps one of the most difficult aspects of a renovation project is marrying a construction budget to an owner’s desired scope of work. Often, I have prepared budgets for owners only to learn that my budgeted cost is 50 to 100 percent greater than what the owner expected. This starts a process somewhat like a dance to see if the contractor can arrive at a budget that matches a scope of work acceptable to the owner. This dance can be a slow, refined waltz or a rapid, complex Bolero.

An experienced renovation contractor can make this portion of the budget process as smooth as possible, and will be better prepared to offer suggestions and alternatives that might aid in closing the gap between the owner’s desired spending limit and an acceptable scope of work. At this stage in particular you will also want your contractor to work closely with the design team to make sure everyone is on the same page as to what work can be done within the budget limits.

A vital tool to help you get a realistic idea of whether or not the project is financially feasible for you is to include a contingency, or financial safety net, in your overall budget. An experienced renovation contractor can help reduce change orders, but he can’t make them go away. There will be some added costs along the way, so working an estimate for those into your initial budget can help cover any unforeseen costs or changes in the scope of work.

I’m sure you’re curious about how a renovation project compares to having a baby. Many of my clients have heard me make this analogy, so it may be a repeat for some readers, but I believe it can be helpful. Think of the pre-construction phase of a renovation project as the nine-month pregnancy. There is a lot of planning going on in preparation of the baby’s arrival. Think of the actual construction portion of the project as the delivery. There will be some pain involved, but an experienced renovation contractor will be alert to pitfalls along the way, and can keep that pain to a minimum.