The Cost of Residential Construction / by keith messick

Question:  How much does it cost to build a house?

Answer: It depends.

Construction is complicated; involving many variables.  And it is expensive.

ANALOGY

What is the cost to buy a car?  It depends.  This question demands qualification.  It does not have a simple answer.

DEFINITION

We must first define cost.  Construction cost is the cost to build the house.  It refers to money spent on material and labor to actually construct the house.  This is also known as the hard costs.  There are many other costs, such as permits, the lot, the architect's fee, utilities, and others, that are not part of the cost of construction (even though you must budget for them and you definitely have to pay for them).  This definition is fairly typical.  However, when discussing cost, never assume.  Always make sure that everyone is clear on what "cost" includes.

RISING COSTS

As the chart shows below, construction costs have risen.  It costs more to build a house this year than it did last year.  And it is probably safe to say that costs will continue to rise.

 Rider Levett Bucknall

Rider Levett Bucknall

COST BY GEOGRAPHICAL REGION

The chart below shows construction cost by major metropolitan area, compiled as of second quarter, 2018.  Cost per square foot is probably the most common way to estimate the cost of construction.   Using Los Angeles as an example, if your project was 1000 square feet, you would simply multiply the cost per square foot by the average ($190 - $335) and get a range of $190,000 - $335,000.  

I usually encourage clients to use a minimum of $250 per square foot for rough budgeting and planning.  This would be an average cost for the entire house.  A project specifically renovating a Kitchen and Master Bathroom will be considerably higher.  New construction tends to be easier to estimate simply because there are no hidden issues waiting to be discovered as walls as opened up.  Renovations and additions always have the risk that something may be found during construction that incerases projecet cost.  

COST COMPARISON: CUSTOM VERSUS BUILDER (TRACT)

The National Association of Home Builders (NAHB) conducts a survey regarding the cost of construction each year.  Below is a table that shows the data from this survey for 2017.  Next to this is data that I compiled on a custom residence that was completed in 2017

The data from the NAHB represents the cost of construction from a builders perspective.  Remember that builders are building many houses and they get huge economies of scale in both labor and materials.  The average consumer will not get these discounts.  

The builders' cost, as calculated from the table above, is $72.20/square foot.  The custom residence comes in at a cost of $195.20/square foot.  There are some differences in the way the costs are presented and calculated.  For example, the custom home includes the cost of demolishing the existing house and grading the site.  This cost is probably listed in the cost of the lot for the builders (and not calculated in the total).  Note also that the garage space is not included in the cost calculations.

Looking at the table of cost by geographical location (above), the cost for the custom residence is in line with what was found by Rider Levett Bucknal.  The cost per square foot in Los Angeles is between $190 and $335.  

In comparing the builders' cost with that of the custom, it is interesting to look at costs as a percentage of total.  In both cases, the cost to build the structure of the house (the foundation, walls, and roof) were 50% of the total.  And the interior work, when including the rough plumbing, electrical, and HVAC, was the other 50%.  It is very important to note that the Interior finishes were 39% of total.  While the exterior foundation, walls, and roof are not optional, the selection of interior finishes can have a dramatic impact on the overall cost.  In the custom residence, for example, there were built-in cabinetry in almost every room.  As well, tile was used throughout as a floor material.  These two choices, alone, greatly increased the cost per square foot.  (The choice of exterior finish can also significantly impact the overall cost.  The custom residence, listed above, had a smooth stucco finish which used a crack prevention mesh layer.  This finish is much more expensive than a sponge float stucco finish).

So...How much does it cost to build a house?

Using an average cost per square foot can be a useful starting point for estimation.  But it ultimately will depend on the building systems chosen, materials selected, and the overall complexity of the design.  

PERSPECTIVE

The following two links provide an interesting perspective on the use of cost per square foot for estimating the cost of construction.  They provide more insight on the cost per square foot conundrum.

REALITY CHECK

It is critical to start a project with realistic expectations.  The project budget must be sufficient to cover the cost of construction as well as the other associated costs such as fees for permits and consultants.  I always ask for the proposed budget at the initial meeting to assess whether or not expectations are realistic.  

Success begins with clearly defining the project scope.  Then, the various components of cost can be identified and discussed, followed by what affects these costs, and, finally, where the client has direct control over (and can make the most impact on) project costs.