Insider Secrets ... Three Rules And A Strategy To Save You When The Storm Clouds Are Gathering

 

I'm about to share some of the darkest times on my own Dream Home Makeover Project. I still find it hard to go back to that time and relive in my mind the struggles we went through. There are so many memories of fear and frustration, of disappointment and even embarrassment. I've never actually shared this particular aspect of our journey in this much detail before.

 

You know, I often reflect on how so many Home Makeover Projects go bad and how, what should be exciting and wonderful adventures, turn into the exact opposite. And that's why I'm passionate about bringing know-how to Homeowners so you know how to avoid the pitfalls, mistakes and common catastrophes that cause so many folks such heartache, anxiety and stress. The worst of it, is most of it is unnecessary ... it could have been avoided. If only they had known ...

 

We had this dream of creating an incredible vacation rental property. A wonderful place for us to have sensational family holidays but that would also generate income from vacation rentals. And so we did a truly crazy thing. We invested in a chalet-style property, in a beautiful countryside location - actually at the heart of a UNESCO Geopark ... one of only 169 landscapes of international geological significance found in just 44 countries around the world. Why crazy ? Well, the location is in a foreign country with a local language we don’t speak.

 

We called this region the "secret garden at the heart of Europe". When we found the property, it was in a very basic condition. It needed a ton of work to bring it up to the standard we wanted, particularly for the guests we hoped to lure to this magical destination that was little known outside of its home country. We felt like discoverers and explorers. At the outset, we were filled with excitement and anticipation.

 

So, we’d bought an ugly duckling but truly believed it would grow into a swan. Without going into too much detail, our plan was to convert this local quality property with only one family bathroom shared between 5 bedrooms, by rearranging some of the accommodation to create two epic master suites of matching size and both with newly created en-suite bathrooms, complete with baths and walk-in showers. The existing family bathroom would be gutted and refitted completely with a free-standing mid-floor bath, walk-in shower and twin wash hand basins. Underfloor heating in all three bathrooms would guarantee guest comfort, particularly in the sub-zero, winter months.

 

On the ground floor, we ripped out the old kitchen and started again, installing brand new kitchen units with oven, glass electric hob, dishwasher and microwave. All of the other spaces were also recreated. A particular treat, was adding a wood-burning stove to the living room to transform those chilly autumn and winter nights as only the warm, glow of a flickering fire can.

 

At the outset and following Home Makeover best practice, I had prepared a cost plan for the project and then developed that into a very detailed budget to guide us financially through the process. And within a few weeks of taking ownership, the works commenced with demolition, stripping out all the redundant elements, alterations to walls and installing new concrete floor slabs for the bathrooms. Within a couple of months the house had become a bare-bones shell. Actually a bit of a wreck.

 

But during that initial strip out was when the first hammer blows hit us ... as we discovered that the existing, coal-fired heating system would have to be replaced completely, along with 80% of the plumbing and drainage and all of the electrics. Hidden from site, the previous owners appeared to have cut corners and carried out an extremely low cost, poor quality refurbishment and we would have to pay the price of upgrading just about everything. The cost prediction nearly doubled within a matter of weeks.

 

To make things worse, just as all these shocking discoveries were rocking us, the storm of the 2008/2009 global financial crisis broke and battered our business, shredded our finances and brought us to our knees. The project funding dried up as loans were withdrawn. And we found ourselves literally unable to travel from the United Kingdom to the property. And there it stood, half demolished, abandoned, empty and unusable.

 

We could see no way out of the mess as the storm raged around us. The "dream home" had become a huge, depressing, millstone around our necks.

 

What would you do if you launched your own home makeover project only to have your budget double for reasons outside your control and then run out of funds to complete the project within weeks of starting the work on site ? It's shocking to even think about such a catastrophe.

 

In truth, such a scale of disaster is rare and we weren't the only ones to be taken by surprise by the financial crash ... wiser heads than ours were caught equally unawares ... so it's probably unreasonable to worry too much about such an event overtaking your project adventures.

 

But, in just a few moments, I'll share three rules that must never be broken and a successful strategy anyone can follow to help to manage your project finances and mitigate the impact of factors both in and outside your control.

 

Hello and Welcome to Home Makeover Project Secrets, the show that equips Homeowners 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.

 

I'm delighted you've joined me today.

 

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.

 

This is the second instalment of the topic I introduced in the last episode - focusing on getting to a budget you can afford and getting the most out of your budget. Today we're addressing what happens when costs start to increase once the works have commenced on site.

 

So, let's imagine a project where, just as you always should, you finalised a budget before works commenced. You've appointed contractors or sub-contractors to carry out some or all of the works and you pull the trigger. Work starts and you're off to the races !!

 

And then something happens that you weren't expecting ... a discovery perhaps. Let's say the project included replacing the tiles on a kitchen floor. You assumed the floor was concrete and screed and commenced hacking up the tiles. But underneath the tiles, there's a dragon lying in wait. The screed falls to pieces and you realise that the concrete underneath is damp and crumbling. This is a long term problem that the old tiles have kept hidden from view. It's too late to just put the old tiles down again and you’re forced to solve the problem before the works can progress.

 

Your budget allowed for the removal of the tiles and then supplying and laying new tiles. But there's nothing in there for removing the screed and repairing the concrete slab, potentially including a new damp proof layer and then re-screeding before the new tiles can be laid. That's a job that could cost thousands. Ouch !! Big. Hairy. Ouch !!

 

These things happen. They happen more often on older properties and on properties that are in worse condition. They also appear more regularly when you are doing more invasive demolition and alterations. And you should also be looking out for them particularly on specialist installations like electrical, plumbing and drainage, hot water, heating, air conditioning. And, no surprise, problems with those installations are typically more costly to solve. You need to always be prepared for the unexpected.

 

And that brings me to Rule No. 1 : Include a Contingency Sum. A Contingency sum, by definition, is a portion of your budget set aside, unallocated, for unforeseen circumstances. The stuff you don’t know you don’t know. Typically a sensible contingency should run anywhere from 5 to say 15% of the total budget. The higher percentage being recommended for those more complex projects or older properties, I've just mentioned. So, if you were planning to spend a total of $ 50,000 then you might include a contingency of around $ 5,000 which is about 10% of the budget.

 

And you're probably thinking "but that means I can now only commission $ 45,000 towards the project". Yes, at the outset that's true. And it’s also wise.

 

Let me help you with a couple of tips about managing your contingency. A contingency sum is really about risk - a topic I'll be addressing in a whole episode in a few weeks. At the beginning of your project, before works have commenced, the risk is highest. Generally, as the project progresses the risk profile changes and the likelihood of unexpected things, that you have no control over, reduces.

 

Let's say you are replacing an old kitchen and maybe you're planning on re-using some of the cupboards. Before you strip them out of the old kitchen space you have no idea how easily they will come out, whether they will be damaged or not, what condition the carcasses will be in. But once they're out, you'll have a much clearer understanding. So during the strip out is when you'll find the unexpected stuff which may mean you have to raid your contingency reserve.

 

So this shifting risk profile can mean that, although you decide to set aside 15% of your budget at the outset, as the project progresses you may feel comfortable reducing that reserve to 10% and even down to 5% and eventually to nothing as the project closes out.

 

In the previous episode, I explained how to value engineer your project to arrive at a scope that fits within the limits of your budget. Now, if you follow that process, there may be some scope items that you’ve put on hold because of the need to set aside a contingency reserve. But towards the end of the project, if you’ve not spent your contingency or only some of it and have reserve funds remaining, you may be able to reallocate the reserve to adding back scope items that you thought you couldn't afford. This applies particularly to items that are easier to procure and don't require major construction activities - like furniture items, light fittings, rugs and artwork, audiovisual items like TV's and so on.

 

It's quite easy to decide that creating the new en-suite bathroom is essential but some new living room furniture is not. So you go ahead with the bathroom but hold back on ordering the furniture. You know you may be able to swap out the furniture at a later date if you end up having to spend your contingency. Then, if you don't spend it all, that's good news because you can add back some of the things you had to cut out at the start.

 

And another way to manage this, is to delay placing orders for items that require complex installation and integration into the job-site. So you do need to get the new WC, the shower tray and the glass shower screen so the plumber and others can fit them at the right time.

 

But again, items like furniture, light fittings, rugs and artwork, TV's and similar stuff can wait. Even if they arrive weeks after the main project works are completed. It's much better to end your project on or under budget than have a whole load of furniture arrive with nowhere to place it because you ran out of money as a result of some unforeseen contingency event earlier in the project.

 

It's a bit like applying the famous Japanese inspired process - first applied on car manufacturing - of "just-in-time". Every item on a construction project is needed at different times. And it's a real science, getting the procurement process so perfectly organised that everything arrives on the exact day the site team need to install it. But you don't need to worry too much about doing that on a home makeover.

 

I've seen numerous projects where contractors have got it wrong and delicate soft furnishings, things like carpets, wallpapers, furniture, get dumped into a rough construction site, getting covered in dust and damaged in a variety of ways because it arrived too soon.

 

So plan to place those orders when you know you can afford them and don't get too hung up if they arrive a little later than needed. It's much easier to tolerate a slight delay to completing than having to find an extra 10% of your project budget.

 

And now, rule number two.

Follow the money. You absolutely must track any cost changes from the first moment your project starts on site. This will give you the earliest possible red flag that costs are moving in the wrong direction. At the start, you should be commencing work with a clear and contracted fixed price with your contractors and sub-contractors.

 

And if there is anything which is still a budget, you must regard that budget as "not to be exceeded". So, when you come to place any order for any item against a budget reserve, it's no good committing to more than the budget. Of course, that doesn't stop you deciding to increase your budget for a must-have item that you know you can afford. That also happens often. But then your budget increases and you place the order in line with the increased budget. Which is not a problem.

 

Real problems arise when you fail to track shifting costs, place orders without tracking against the budget and suddenly, to your horror, discover that you've spent all the available funds and the works still have a ways to go.

 

This is particularly important when managing contractors and sub-contractors, manufacturers and suppliers ... I'll just refer to all of them as contractors so I don't keep repeating myself.

 

And here are a couple of expert strategies you must rely on. When you appoint your contractors, make it clear you will not pay a dime over the contract sum or order value unless you have agreed in writing in advance of any cost increase. Which means they must warn you if a cost is going to increase and seek your approval. This way, they can't highjack you with a surprise increase you weren't expecting a month after it has happened. And when it's way too late for you to take action to mitigate or avoid or reject the increase.

 

Here's a simple example. Let's say there is a light fitting the electrician is supposed to supply and install. And when the electrician goes to buy the fitting he discovers the cost of the fitting has doubled. He's unlikely to swallow that cost increase. But it’s unacceptable for him to say nothing, buy the now much more expensive fitting and, at month end, just casually announce the $ 500 fitting has cost you an extra $ 500. No, following due process, he needs to reach out and advise of the massive cost increase of that item and ask you to instruct what you want him to do. At that point, you can raid the contingency if there are reserve funds, or decide to increase your budget or ... frankly, my preferred option, go find a similar light fitting closer to the original budget. No need for any increase.

 

A process we always follow with our construction professionals, is to require them to provide end of week updates on any changes they think have happened and any cost they think may have increased as well as providing a look ahead and early warning of any anticipated changes from the contract sum or order values. With advance warning and reporting at the time of any cost changing events, means they get dealt with in real-time and not, as is so often the case, after the end of the project, when you get given a shopping list of changes and a 35% cost increase on what you were expecting. That's when the wheels fall off and the ugly crying starts. All avoidable.

 

And this brings me to Rule No. 3. Take immediate action.

By tracking the changes at least weekly, you can take action to resolve the problem or at least find a workaround - whether it's increasing the budget and finding the extra cash to pay for it or changing the product choice for something cheaper, to sidestep the cost increase.

 

When dealing with sudden discoveries, they may very quickly become significant. This may lead to having to take drastic action. Even to the extent of stopping work on site while you work out what to do to solve the problem.

 

On my own home makeover project, we did exactly that. All work stopped on site. The huge budget increase was more than we were willing to spend. We had to find a workaround. And this led to the general or main contractor refusing to continue the project. Which escalated our problems. But in unexpected ways, became part of the solution. The main contractor had been a very under-committed partner up to that point - perhaps no surprise he was willing to simply walk away. After his exit, we were able to appoint a different contractor with a lower cost base and therefore more reasonable price point. So we ended up even saving money on scope items where the original budget was not under pressure. And that, with other tactical moves, helped us bring our budget back under control. We had to make compromises but, in the final analysis, nothing left us disappointed with the end result.

 

I shudder to think what would have happened if we had kept galloping forwards with the original contractor, incurring higher costs and increasing our overall spend.

 

And finally, as promised, here's a simple strategy you can apply when you do need to take action in the face of rising costs and when increasing the budget is not an option. Just like I recommended in the last episode, this will require you to make pragmatic decisions. To find a practical, workable solution. As always, if you haven't listened to or watched the previous episode, you can find it by visiting thediypm.com/podcast and following the links to this or the previous episode.

 

Now you may be stuck with a cost increase you can't afford unless you do something drastic, like reducing the cost of the remaining works or actually omitting scope or changing the scope. A practical starting point is to have a workshop with your contractors. Get them around the table, explain the problem and ask if they have any suggestions for ways you can save money. It's important to make clear how serious the situation is and that the project cannot progress at full speed until the problem is resolved.

 

Ask them to offer options of how they might alter their scope to reduce the overall cost. It's likely they will suggest things you wouldn't want to accept but collective thinking may open up options you weren't even aware of. I will often ask them to tell me what they would do if this was their project. For example, maybe you had settled on a particular air conditioning system. But maybe the specialist sub-contractor suggests an alternative brand name that, in his opinion, will do the same job and be just as reliable but for a lower cost. Well, that's worth considering.

 

What you are looking for is a list of options. Then you can rank those options in terms of impact, relative preference, how much you like or don't like them and so on. It really helps you to make an informed decision. Probably the worst solution is to say, "we are now 15% over budget and I have to cut 15% out of every work element or work package". Just as I explained in the previous episode, this usually just makes everything cheaper and overall, is likely to be disappointing.

 

Sometimes it can help to state the problem as a total amount rather than as a percentage. Like saying, "Costs have increased by $ 12,000 and that's a real problem. So we have to find ways to save $ 12,000 before we can commit to progressing further with the project." Promote lateral, out-of-the-box thinking. Brainstorm. Unlock the power of the expertise in the room.

 

And the final tactic I've often used. When you have no other option but to reduce costs, target items that are less important to the aesthetic or function of a space while retaining at least one or two "hero" elements. Let me explain this with another example. Imagine a shower room. Budget was $ 7,500 but forecast cost has increased to $ 10,000. So your goal is to save $ 2,500. Always remember that saving money and what is or isn't acceptable is a very personal perspective ... so don't knock my choices, just understand it's the process I'm explaining that matters. Saving 25% off the forecast cost will be tough. Start with the finishes. Take the tile on the walls. Your original intent may have been to tile all of the walls full height throughout the room.

 

But in terms of functional need, maybe you can get away with just tiling the shower cubicle and maybe the wall behind the wc and a splashback above the hand basin. That would equate to say a 50% saving on the wall tile supply and fitting cost ... although don't get so excited and forget you now have to add back some budget for decorating the walls that would have been tiled ... although at a much lower cost per ft2 or m2. So you haven't chosen much cheaper tiles throughout the room, you've kept the fab tiles you chose but reduced the area by 50%. And you work your way through the costs for the room one-by-one.

 

Let's say you are upgrading three bathrooms in one project. Ideally you want to improve all of them to a similar standard. But if you’re struggling to contain costs then choosing to simplify the design selections for the family and secondary bathrooms makes real sense while you retain the full, high specification for the master en-suite bathroom. After all, when you or future buyers view the property, they'll be delighted by a high quality en-suite but relatively less concerned about those other bathrooms - so long as they still provide the right functionality.

 

In closing, let's do a quick recap ...

Three rules :

Rule 1 - Include a Contingency Sum

Rule 2 - Follow the money - track any changes at least once each week

Rule 3 - Take immediate action and stop the works if necessary until you have a workable way forwards

 

And apply a pragmatic strategy to reduce costs, making sure to retain a few hero elements to offset savings forced on you. This way you haven't just made everything cheaper.

 

For more tips, tricks, strategies and insider secrets, join me on the next episode of Home Makeover Project Secrets.

 

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. There’s one coming up soon. 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