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Topics of importance for people about to build or renovate

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Respecting Construction as an Investment Risk

For most of us, the building and renovation projects we undertake for our homes and businesses involve a substantial portion of our savings or capital improvement money. Yet we often fail to take the time to understand the financial uncertainty inherent in building and renovation work. From an investment viewpoint, we do not approach the managerial and operational parts of the project work with the same rigor and prudence that we tend to use when researching other financial vehicles, many of which get far smaller amounts of our money.

We are aware of building projects that have had financial difficulties and / or cost disputes with the builder. Such an awareness should encourage us to approach the development and management of our own projects with thoroughness and care foremost in mind.

A first step in dealing with the financial risk associated with building and renovation work is to fully grasp the creative, one-off nature of the building product. Your project begins with only a space need or problem, and a blank sheet of paper. No matter how similar you think that your work will be to that of a neighbor or a business competitor, the particular way you live or operate your business, the special characteristics of your site and any building on it, and the level of your financial resources will suggest a design solution that is especially suited for you — and different from that for anyone else.

Because your project situation is unique, assigning an accurate cost to the work by comparing it with apparently similar projects elsewhere is financially dangerous. It is natural to want to do so early in a project to get a sense of its potential cost. An architect or a builder, usually prompted by an anxious owner during an initial meeting, may hazard a guess of the project’s cost. It is common to find that such relatively baseless guesses, however strong the experience of the person doing the guessing, are not close to the final construction cost. Relying on them to make important subsequent project decisions is simply not wise.

As is the case when making other investments, the most prudent course of action is to try to reduce the level of one’s risk by finding out more information about the investment. For building projects, this is accomplished by having your architect research what building work will be allowed by the local planning code and, then, having him develop a building design for you. The design needs to be developed to the point that your contractor’s pricing accuracy for the amount of information shown on the drawings is one with which you are comfortable making the decision to proceed with the work. Expect to incur a sufficient architectural expense to produce a design with enough specificity to achieve this.

Your contractor should tell you about his past experience estimating costs accurately from drawings and specifications at various stages of design development and completion. He should also give you an idea about the number of client-initiated changes he has encountered on projects once they are under construction, and what their impact has been on his final pre-construction cost estimate. If your architect and your contractor have not worked together before, as is commonly the case, anticipate that they will be unfamiliar with each other’s way of thinking, the assumptions each is used to making for information not yet shown on preliminary drawings, and the level of workmanship each expects for their projects. These factors will have an impact on the accuracy of the cost estimate. You may wish to consider the following schedule of estimating accuracy as one guide:

Level of Drawing and Specification DevelopmentAccuracy of Estimate vs. Final Cost

No drawings or specifications± 125%

Preliminary Design Drawings± 50%
(Floor Plans, Elevations, Finish Information)

Design Development Level Drawings± 25%
(Site Plan, Floor Plans, Elevations, Sections,
Major Details, Preliminary Specifications)

Complete and detailed Working Drawings
and Specifications± 10%


Minimal Working Drawings and Specifications± 40%
(only enough information to secure a building

In today’s construction market, a 500 square foot residential addition of average quality can easily cost over $175,000. With this amount of money on the line, a knowledgeable building client will recognize that the comfort gained to reach a wise building decision by making a relatively modest expenditure for preliminary design and construction cost information can be significant — and essential if cost control is a serious goal.

John McLean, Architect
San Francisco
(415) 777-9767