Discover … The Ingredients for an Elephant Feast !!

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In the previous episode, we discussed the Home Makeover elephant in the room and I shared the secret to eating an elephant - sorry, you'll have to listen or watch episode five to discover the answer ... no spoilers here !!

 

In the context of home build projects, our elephant is "Cost" - because cost is the most dominant factor that influences Home Makeovers.

 

Elephants are among the most magnificent animals in all creation and meeting one up close is an extraordinary experience. And the African Savannah elephant is the largest of all.

A few years ago, I was privileged to meet and feed one by hand ... quite beyond anything I had ever dreamed of doing ... I know, unbelievable. An absolute joy. The imposing but gentle giant rumbled quietly to herself as I literally placed handfuls of food into her open mouth.

 

Mostly we regard elephants with awe and we appreciate their dignity and epic stature although they can also be unexpectedly hilarious. I remember seeing a video of elephants that had eaten fermented Amarula fruit, staggering around like Friday night drunks. And there's a delightful clip on YouTube of a baby elephant chasing birds - just like a hyperactive toddler, falling over his feet and trunk and ending up collapsed in a tangle.

 

But, with their enormous strength, elephants can also cause catastrophic havoc in the wild when they devastate crops and trample villages. And that's not funny at all.

 

Talking of catastrophes, if you've listened to Episode 1 of Home Makeover Project Secrets, then you've heard the sorry tale of my own House-of-Horrors Home Makeover that went badly wrong.

 

A particularly ugly part of our story - which I haven't shared in detail before - was how a herd of elephants almost derailed our project. Yes, not just one elephant but a whole herd !! And I'll tell you what happened in just a few moments ...

 

Hello and Welcome to Home Makeover Project Secrets, the show that equips Home Owners with the skills and understanding to execute successful home projects, that goes behind the scenes of Home Build Projects to unlock the secrets and share insider tips and strategies to save money and time on any and every home project. What you learn will give you the confidence to embark boldly on your next project and you’ll know what to do so your story has the happy, dream home ending you deserve.

I’m your host, Andrew Philips …

 

When I talk about "Home Makeovers", I include renovation, remodelling, alterations, additions, going up into attics and down into basements, redevelopments and even ground-up new builds. Any and every project where you're going to be appointing professionals, designing something, buying materials, carrying out construction work, employing contractors and sub-contractors, suppliers and manufacturers and even if you're doing some or all of the work yourself. All things home build.

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I'm delighted you've joined me for today's episode.

 

Because we're dealing with what might be quite complicated information, especially if you are unfamiliar with some of the terminology and processes, the show notes and transcript will be uploaded to our website www.thediypm.com so you can easily revisit any episode and refer to the key information shared each week. And, of course, if you prefer to watch or read an episode, rather than listening, you'll find links on the website as well. We also include any links to resources, free gifts and other useful information mentioned during episodes.

 

And now, back to the elephants ...

 

Ok, so it wasn't really a herd of elephants ... my project was in central Europe after all, although there were a few wild boars, some deer and a family of Pine Martens who moved into the roof. No, no elephants ... but there WAS a whole herd of major cost problems that hit us one after the other.  And it felt like we'd been trampled by elephants. We discovered work-scope that we had not anticipated which meant the budget skyrocketed. The international exchange rate plummeted so even when local costs were stable, the amount we had to pay kept increasing. And then the global financial crisis arrived like an express train. We ran out of cash as our savings ran dry and there was no way we could borrow what we needed to complete the project. We literally hit the wall. All work stopped dead. And our half-wrecked property that looked like a bomb site midway through the demolition, sat silent and uninhabitable. I could literally see no way out.

 

The information I am sharing through this Podcast series is aimed at helping you and other Homeowners to avoid ever finding yourself in a similar situation; I want to equip you with the knowledge you need to execute your own Home Makeover projects with confidence so you don't waste time or lose money along the way.

 

Last week, for our elephant appetiser, we started with an overview of the typical project cost process. This week we're going to pause for breath and explore some of the detail ... a bit like checking out the ingredients in the chef's shopping basket. Restaurants can get ingredients from a variety of sources - they can go direct to source, to farmers and other growers so they secure the freshest ingredients possible or they can buy from wholesalers to get ingredients from a variety of different types of growers and suppliers. In construction, it's quite similar.

 

When you run a project, costs arise in two principal ways and on most projects there will be a combination of both.

 

We'll call these Direct costs and Contractor costs.

 

Direct costs arise when you buy stuff yourself from a manufacturer, supplier or retailer.

 

Contractor costs arise when you buy stuff through a contractor - or rather you pay the contractor for stuff the contractor has bought and often assembles, fixes or fits on your behalf. And the contractor in this instance may themselves be a general or main contractor or a sub-contractor or a supplier or manufacturer. As part of the contractor's services they typically add value to the raw materials they purchase for you - like buying the fixtures and fittings for a bathroom - the bath, the pipes, the shower tray, the sliding glass door, the faucets or taps and so on - and then installing them into your new en-suite master bathroom. In doing so, they add their skilled expertise and labour into the project. So contractor costs are likely to be a composite total of various elements.

 

Typically, anything you buy direct should be cheaper than if you buy if from a contractor. Why ? Because the contractor, like any business, should be making a profit working for you and so will add their overheads and profit margin onto the net cost - that is the cost he pays to purchase it before he sells it on to you.

 

Overheads are costs the contractor incurs as a result of operating a contracting business that need to be recovered but which are not directly attributable to your project. So the contractor seeks to recover those costs from all of the projects they will deliver each year.

 

Some examples of overheads could be office rental, workshops and storage facilities, vehicles, mobile phone costs, staff - like head office administrative workers and accountants - and so on. The percentage a contractor adds on for overhead is typically based on their anticipated budget for running costs for the year divided by their anticipated turnover. This would mean that if a contractor expected to deliver projects valued at around $ 10,0 million in a year and his overhead forecast was around $ 1,0 million then he might add an overhead markup of 10% to 12%.

 

Profit is what every business should add to the gross base cost, including those overheads I've just mentioned. Profits can vary from contractor to contractor and from industry to industry. A busy, highly regarded contractor may be able to charge a profit mark-up of say 25% on their projects while another less successful business may need to add a lower mark-up to remain competitive and to win work.

 

Often, larger contracting organisations have higher overheads and expect to make higher profits - especially if they are publicly listed businesses. But this isn't always the case. A smaller contractor may have  much lower gross overhead cost each year - say $ 150,000 but if his net turnover before overhead is only $ 750,000 then he'll have to add a 20% markup to recover his overhead costs. To compete with the larger company, he might have to add a much lower profit mark-up of only 5 to 10%. But if he is well regarded, delivers exceptional service and is reliable then customers may be willing to pay a higher charge for his improved performance.

 

It's also worth mentioning that it isn't always cheaper to buy materials direct. In this case, you may have to buy them from a retailer for a higher base cost, whereas the contractor may be able to buy direct from a manufacturer or supplier who doesn't trade direct with end-users - the public like you and me. If contractors buy a lot of materials from a particular manufacturer or supplier then they are likely to be able to negotiate discounts not available to smaller customers. This means that even adding overheads and profit, the amount charged by a contractor could be lower than the price you can buy it for.

 

So we've introduced direct and contractor costs and we've highlighted overheads and profit.

 

There are two other costs Homeowners often forget to take into account.

 

The first is delivery charges. Whenever you compare costs - whether buying direct yourself or from a contractor - remember to make sure the price quoted includes delivery to the location where the materials are required. And that needs to be for delivering and unloading. Depending on what the item is, those costs might be significant. If you're buying bricks to build all the new walls, then there'll be a lot of hard work if the supplier does not unload them off the delivery vehicle. If you have to do it yourself it could take hours of backbreaking labour or you might have to employ unskilled labourers to help you. That will add to your direct cost and you need to account for it.

 

The second is the cost of your own time. Those of us who love to do things ourselves often fail to consider the cost of our own time which has a real value and the overall time it will take to complete a piece of work. I may be capable of doing all the decorating in my Makeover project instead of employing professional Painters and Decorators. But, unless I am unemployed, and there really is nothing else I could be doing, then my time has a value and that "invisible cost" should be calculated. Especially as it is likely to take me much longer than a team of professionals to do the work - especially if I can only work in the evenings and at weekends. So if a task takes me four weeks to complete whereas the professionals could knock it off in just a few days with a team of three, you need to consider whether that three week plus delay is affecting your overall costs. Imagine if you were renting an apartment while you remodelled your new home before moving in. The rental might be $ 1,500 per month. If it takes an extra 12 months for you to complete the project working those evenings and weekends, that would be an extra $ 18 thousand dollars in rental charges you would be paying out. And that amount should be added to the total cost of your project. Those rental charges might be a much lower total if the professional contractors completed the works in just one month. And that's not taking into account the impact of long delays to moving into your home on your family and the inconvenience they have to put up with.

 

So these are costs that should be considered. This is another time the Circus skill discussed in Episode 03 is required. And comparing how you will procure and deliver different parts of the work, comparing the pros and cons of cost and time, is a regular part of most home makeover projects. We'll discuss this aspect of project coordination again in future episodes when we discuss different procurement routes - different ways to get the job done.

 

Another type of cost worth making sure you are aware of are the costs that are only indirectly associated with the actual items of work or work elements. Works costs include carpentry, timber, electrical items and electricians, floor tiles, furniture and curtains. But there are other costs that must be taken into account when developing your Budget - these include costs like works insurance which your mortgage or bond-holder might require while the work is being carried out - when the risks to the property may be increased and so a regular home insurer may not cover that risk profile in a typical homeowner policy.

 

Other costs in this category might be professional fees and expenses - like for your Architect or Interior Designer or structural engineer, Planning approval fees, Building Code and Inspection fees, utility connection fees - these are not Overhead costs because they are directly associated to your project but they don't specifically arise because of one work element - they apply to the project as a whole. And they can be paid direct by you as Direct Costs or may be paid on your behalf by the contractor who will then add their overhead and profit markup.

 

At the very granular level of costs let's take a quick look at two examples of actual work elements.

 

For the first, I've picked concrete which has various raw materials as ingredients. Concrete is often used for floor and roof slabs, beams and columns. To make concrete, there are three principal components - materials, labour and plant or machinery which may also be referred to as tools or equipment.

 

There are three main raw materials. These are sand, stone aggregate and cement with of course water which is added during mixing. The labour component is likely to include both unskilled labour doing the bulk of the heavy handling work with a skilled labour element supervising to ensure the correct mix ratio of the raw materials is used and other critical criteria are met.  Unskilled labour is typically cheaper than skilled labour but if a particular element uses a lot of unskilled labour then the cost can increase significantly at which point it might be necessary to consider if there is additional or alternative plant or machinery which might be used to reduce the labour costs.

 

The plant or machinery component is likely to depend on the amount of concrete required.  Smaller quantities can be mixed by hand using shovels or spades and wheelbarrows. As the quantity increases, it may be easier and faster to use an on-site concrete mixer. Once the quantity becomes significant and speed of delivery and placing it becomes relevant, then concrete manufactured off-site and delivered to site ready-mixed, in a specialised delivery vehicle, is typically the way to go. Hand-mixed is usually cheaper than using a cement mixer which is again cheaper than a ready mixed alternative but again scale and time requirements will affect this. Mixing a large quantity on-site by hand with lots of labour may actually end up costing more and take way too long.

 

For the second example, I've picked a new doorway. We'll assume the opening has been made already and so now we want to install a new door. So let's start with the Materials. First, the door. Then the frame and finally the hardware or ironmongery - that includes the handles, the hinges and maybe a lock. In some cases you might buy the whole unit - the door, the frame and the hardware from just one specialist manufacturer.

 

If you are looking for something very unique or very specific for the design or location, you might actually fabricate the door yourself on site but more typically we buy a ready-made door. This is likely to mean that we start with the frame - which just needs timber and then paint to finish it. Next, for the door we might buy this from a manufacturer or supplier and there are many different types - like oak, panelled pine, glass and painted external shown in these images.

 

Similarly, there are multiple different types of hardware - brass, stainless steel and other materials in many different shapes and functions - these are also usually procured from manufacturers, suppliers or retailers. The labour required for fitting the new doorway is likely to include a finishing carpenter and a painter or decorator for the frame. The same finishing carpenter will probably also be able to hang the door and fit the hardware. Typically the carpenter and painter / decorator will just use small tools as opposed to major plant or machinery. Of course, if this is a major project with say 25 or 50 doors then a forklift or even a crane might be needed to move pallets of doors around the site.

 

I wanted to use these two examples to demonstrate that there are a lot of decisions to make even at a granular level on Home Makeover Projects and making the right ones is how you save time and money as projects progress.

 

I also used a doorway as an example because many Homeowners have a vague idea of what it costs to buy a door - just the door itself, from a local hardware store - let's say $ 150. But when the contractor provides a price to install the door they may quote say $ 760. The Homeowner falls over in horror, spluttering and choking with rage. How could it possibly cost $ 750. Well, from what we've discussed today, now you know - the frame is extra - another $ 75, the labour to make up the frame and fit it, to hang the door and fit the hardware another $ 125 then the decorator costs a further $ 100 and his paint is $ 25, add to that the hardware at $ 75 and you get to $ 550. Now we need to add $ 50 for picking up the materials from the suppliers and delivering them to site. On top of the total the contractor adds 10 % overhead at $ 60 and then his profit markup of 15% which is about $ 100 and the overall total is therefore $ 760. While the homeowner wasn't wrong that he could go buy a door for $ 150, that was literally just for the door but the contractor’s price is to supply and install the door AND frame, decorated, hung, complete with all the hardware fitted and it will be executed quickly and professionally.

 

A last cost to mention - also very real - but not immediately obvious is a risk related cost. This is the cost of making mistakes. When a Homeowner goes shopping to buy materials, like a door, they may not realise that the door needs to achieve a certain fire rating and it will need to be a particular size to fit the new opening. And when buying door handles, hinges and locks there are many things that can go wrong. If homeowners are buying the materials themselves and make any mistakes, then they have to sort out the problems at their own expense. This might mean trying to return the bits to the suppliers which may or may not be possible or at best may incur a restocking charge so only a proportion of the cost is recovered. On the other hand, if a contractor is doing this, the contractor carries these risks. Of course, the risk for a professional contractor should be much lower as they are doing this day-in-day-out and in the event they do make a mistake, they may be able to use and mis-ordered items on other jobs.

 

The reason I am sharing these perspectives of the process is to make sure you are aware of the process and what can go wrong before it does so when you decide how you are going to procure your project, you will do so in the least risky way or at least balances the risk.

 

And so here's a really effective insider strategy - the secret, when you are an amateur or at least less experienced is to save on items with low risk but make sure the contractor carries the risk for more complex items. So a simple example might be that you buy items like a TV and furniture yourself while having your contractor buy complex technical elements with multiple interrelated parts like electrical, plumbing and lighting installations. This way you save the overhead and profit markup on those low-risk items. But avoid the risk on the more complicated work elements.

 

And that wraps up our second episode focusing on project costs.

 

In the Next Episode we'll be doing something a little out of sequence by looking back over the past six episodes as I expose a huge mistake I've made and set matters right. But you'll have to join me next week to discover what's gone wrong !! And benefit from the solution.

 

To make sure you never miss an episode, why not subscribe to Home Makeover Project Secrets on our website at www.thediypm.com where you'll also find our blog posts and details about our upcoming Project Masterclasses and Training Courses.

 

If you have a question about a project you're planning or already running, please reach out and email me on faq@thediypm.com . If you have a challenge to overcome then I can just about guarantee others are also facing the same or similar challenges. We'll be answering listener questions in FAQ episodes every few weeks. It’s always reassuring to know you’re not the only one battling away …

 

It's been great to have you with me today and I look forward to having you back for the next Episode of Home Makeover Project Secrets.

 

All the best on your Home Makeover project adventures.

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Andrew Philips, Project Management Coach