Home Building Cost Control

Cost control for owner builders involves two areas:

1. Controlling the Spending
2. Job Cost Accounting

Control of spending

Cost Control starts with a spending plan or budget. When you finish your home building Cost Estimate, that's your budget! But how can you make sure that what you have planned is what actually happens?

First of all, you need to understand that it probably won't . . . at least not exactly. Your home construction Cost Estimate after all was only an estimate. Prices may change on some items between the time you estimate the job and the time you actually build.

You may decide to make changes in design, finishes, or equipment that affect your estimate. You may find that the subcontractors you had planned to use is busy and you have to use one who charges more. The point is to just be prepared for some variation.

As you learned when you did your home building Cost Estimate, there are two basic kinds of costs you will be involved in controlling - materials and labor.

COST CONTROL - MATERIALS COSTS

Controlling materials costs involves six items:

1. An Accurate Takeoff
2. Using Purchase Orders
3. Receiving Materials
4. Storing Materials
5. Controlling Waste
6. Control of Theft

ACCURATE TAKE-OFFS
This was discussed and hopefully accomplished when you put together your Cost Estimate.

PURCHASE ORDERS
After budgeting (the Cost Estimate), the second step in home building cost control is to know what you are spending - before the fact. That means using Purchase Orders.

Armed with the information in your Cost Estimate, you will be able to prepare your Purchase Orders accurately. You can get good all-purpose purchase orders at any office supply store. Or you can use this generic purchase order from businessownersideacafe.com.

Using purchase orders will let you and the supplier know what you intend to spend. It will also give you a record against which to match the supplier's delivery receipt and invoice.

Using purchase order forms may sound very basic, but you'd be surprised how many builders do not bother. It takes a few minutes, but the effort is worthwhile - especially if there is a later disagreement about what was ordered and when. It is even a good idea to send a "confirming" P.O. after a phone order. Just fill in the purchase order as usual and mark it "Confirming telephone order to John Smith. DO NOT DUPLICATE SHIPMENT."

Your purchase order will show the identity of the vendor (supplier), when and where the material is to be delivered, and the quantity, description, and price of each item you are ordering.

RECEIVING MATERIALS
Another piece of home building cost control is being consistently involved in "receiving" materials as they are delivered to your home building site. You can use your copy of the purchase order as a receiving document. Just show right on the purchase order, the amount of materials you actually received. Here is the source of much disagreement between suppliers and builders.

Builders often claim that they can't always be at the job site to count and sign for materials when they are delivered - and that is probably true. On the other hand, once the materials have been sitting on the job for some time (probably unattended) it is impossible to confirm what was actually delivered, should a question arise.

From a stand point of home building cost control, the proper receiving of materials is a good practice to get into. This means being at the job site when materials are delivered and confirming what has actually been received before signing the delivery ticket.

Just remember, your order was pulled and loaded by human beings, and human beings do make mistakes. If you have been shorted, make a note on the copy going back to the supplier as to the quantities you actually received.

Have his driver sign for what he delivered on your receiving report (your copy of the purchase order). As soon as possible, notify the supplier of the discrepancy.

STORING MATERIALS
Proper storage of materials can help control your costs. Have materials stored so that they are not damaged by weather or operations. Unused materials may often be returned for credit or a refund if they are kept in a resalable condition.

So try to keep materials from being drug through the mud, stepped on, and splattered with paint.

CONTROLLING WASTE
There will always be some waste on a construction job. It is impossible to order exactly the right number of pieces to build with nothing left over. But excessive waste is one of the real cost problems you'll have to try to control, if you are going to stay within your budget.

Your major weapons in controlling waste are an up-front understanding with the subcontractors that excessive waste will not be tolerated, and a vigilant eye to enforce your policy.

Large or whole pieces of plywood, siding, or drywall dumped outside the home and 2 x 8's twelve feet long that are used for walk boards across muddy yards are a couple of examples of situations that should raise your ire.

Have agreements with your suppliers that unused material in resalable shape will be taken back for a refund - without a restocking charge!

CONTROLLING THEFT
The next item for consideration in home building cost control is to make sure that what you have ordered, and what has been delivered, actually gets incorporated into your home. That's hard to do if it gets incorporated into some nearby neighbor's basement.

For some reason, many people seem to think that it's OK to "pick up" some of the "extra" materials at job sites. If you're not careful, you'll be stolen blind. Here are some techniques to help reduce theft.

1. Try to have materials delivered on the day they will be used. This is not always possible, of course. But when it is, do so.

2. Secure materials in fenced areas or storage facilities. As quickly as possible, get the home to the point where it can be locked up. Then you can use the home itself for securing valuable materials.

3. Talk to the neighbors. Ask them to help you keep an eye on the job while you are gone, to note the license number of anyone who looks suspicious, and to even call the police if there is obvious theft or vandalism going on.

This is a good way to meet your new neighbors early on and to begin establishing a relationship of trust (if they're in charge of making sure you're not getting ripped off, maybe they'll be less likely to be the ones doing the ripping).

4. Ask the local police to drive by on a more frequent basis while you are at the highest risk. If you do experience a problem, report it at once. This will elicit better cooperation from the local police.

5. Post the property: "No Trespassing" and "Theft Will Be Prosecuted."

6. Carry insurance to protect yourself against excessive theft. We say "excessive" because there will be a deductible involved before the insurance company begins to pay.

PAYING FOR MATERIALS

Matching Purchase Orders, Delivery Receipts, and Invoices
Here is where your faithful efforts in properly receiving the materials pays off. If you've done a good job, you have a record of what was ordered and what you actually received.

If you were shorted, the supplier was notified at the time of the shipment. So there ought to be agreement about what you owe. Carefully check the suppliers invoice against your records of what was received and what you agreed to pay on your purchase order.

Report any discrepancies to the supplier at once. You should then pay the undisputed amount. Do not hold payment on the entire invoice to straighten out a $5.00 disagreement. This will adversely affect your credit standing.

CASH DISCOUNTS
Another thing you should pay close attention to when paying materials suppliers is cash discounts. Some suppliers allow you to deduct a percentage of the invoice if the bill is paid by a certain time - usually the 10th of the month.

The discount is typically 2%, but can be as high as 5%. Taking advantage of these discounts can save some significant dollars.

CONTROLLING LABOR COSTS

The second part of controlling your spending - after getting a handle on materials costs - is to control what you spend on subcontractors.

USING SUBCONTRACTORS
We are assuming for our discussion here that you will subcontract
most, if not all, of the work on your home. For that reason, traditional labor considerations like man/hour estimations will not come into play.

Rather, we will deal with the contractual arrangement between you and the subs. Just as the central tool for controlling Materials Costs is the Purchase Order, so the main tools for controlling Labor Costs are the Subcontractor Agreement and the Change Order.

SUBCONTRACT AGREEMENT
For effective home building cost control, it is important that you maintain a business relationship with subcontractors. The Subcontractor Agreement will help you do that. It is a contract between you and the sub. It spells out exactly what is to be done and the price you have agreed to pay.

Make sure that you and the sub are clear on the subject of "extras." This is an area where many people get burned. The Agreement should also specify who is furnishing what in the way of materials, tools, and insurance.

It should address the question of the manner in which the work is to be accomplished - timely, workmanlike manner, in accordance with industry standards, etc.

It may specify specific remedies for breach of the agreement, and touch on a variety of other subjects.

Your agreement should also specify when the sub is to be paid. With the exception of the electrician, plumber, and heating/air-conditioning people, you should not pay for subcontracted work until all of the work is completed.

In commercial construction it is common to withhold a "retainage" of 10% for a certain amount of time even after the work is finished. This makes good sense, but is not common in residential construction in most parts of the country. Why would you want to do this?

SUBCONTRACT AGREEMENT FORM
Our Subcontractor Agreement Form is available by clicking here. Generic agreements are available through office suppliers and blue printing companies. This is a legal contract. Have your (real estate) attorney look it over. You can change it to meet your needs.

CHANGE ORDERS
It is important that you have a consistent way to handle changes in your agreements with subs. Our Additional Work/Change Order is a good way to control this facet of the relationship.

Make sure that your subs understand that nothing outside the original contract (Subcontractor Agreement) is authorized or will be paid for unless the Additional Work/Change Order form is executed.

Then make yourself live up to it. Take the time to get it in writing. It will pay off in the end. This will not guarantee that you will not have misunderstandings with subs or disagreements over what was to be done, but it will help greatly.

When you take the time to reduce something to writing, it shows the sub that you are serious about having an agreement that you both understand. It will discourage his coming back later with a totally different story.

OTHER cost control CONSIDERATIONS
Additional forms which may be used to help you get organized in dealing with your subs are available here.

1. The Subcontractor Directory. This form was introduced when we looked at finding subcontractors. It can be duplicated and kept in a notebook organized alphabetically by sub type - masons, plumbers, etc.

2. We also introduced the Subcontractors Information Sheet. It gives you a place where you can keep all of the pertinent information on each sub in one place. File these alphabetically by the sub's name or company name.

We have found it handy to make a Subcontractor Book, by making multiple copies of this form and putting them in a three ring binder with alpha index sheets separating the various sub classifications (Electrician, Plumber, etc.).

3. The Subcontractor's Statement is used to establishes a firm, recorded understanding that the sub is self employed and responsible for his own taxes. Have the sub sign this at the same time he signs the Subcontractor Agreement.

4. Specific Lien Waiver This is is used to confirm in writing that the sub has been paid what he is due and that he will therefore not place any liens on the property. The sub should be required to sign this form at the time he is paid for his work.

Liens are legal encumbrances that subs and suppliers can initiate against the property to collect for their work and materials. If you pay your bills, you shouldn't have any problems with liens. If an unjustified lien is placed on the property, see your attorney to get it cleared.

The wording of the Specific Lien Waiver may not be exactly what is needed in your state. Check with your attorney.

PAYING SUBCONTRACTORS
In most cases you will pay the subcontractors on the job site. Before paying a sub, carefully review the Subcontractor Agreement and any Additional Work/Change Orders concerning the sub.

Then inspect the sub's work very carefully to determine if the sub has satisfactorily completed all of the work agreed upon. Never pay a sub for half-finished work unless you have agreed to do so before the job began.

This kind of thing goes on all the time. You are not responsible for meeting your subcontractor's payroll. You don't owe him until the work is completed. Be understanding but tough. Don't give in.

SUMMARY

Well! That's quite a chunk of material to digest in one sitting. I think it would be a good idea for you to print out these home building cost control web site pages, three-hole punch them, and put them in a notebook! You can highlight important reminders and use them as a field manual.

Other areas of responsibility in Construction Management are Purchasing, Scheduling, Inspections, Quality Control, and Cost Accounting. Click here to go back to Construction Management.

For additional insight to controling your costs,
see Lesson Twelve of our online course
Successful Home Contracting.

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