How To Establish A Building Cost

Establishing A Building Cost
Is All Part Of The Development Process

Hello Colm Dillon here ...

There are several stages to go through in establsihing a building cost.

Each stage reflects the amount of detailed information you have to cost.

At the beginning, when you have just found your prospective development site, you will complete a "broad brush" feasibility study.

Let's assume that you know from you local knowledge that it costs about $100,000 to build a townhouses.

You have worked out that you can build four on the property, so you put in $400,000. Indeed you might put in a building cost of $450K, with the extra $50K as a contingency allowance, because you don't have any plans drawn up yet.

This feasibility should have enough safety built into the figures on the 'cost side' of the equation, so that if you include your 'profit margin,' and a fair market land cost, then you know you have a feasible development.

Once you gain control of the property, an architect will prepare a preliminary site lay-out plan which will be prepared on the basis of what the Local Authority Development Rules allow.

From this you'll have several plans drawn containing the following:

a. Say four townhouses, in 'block' form (no internal details)

b. All townhouses will be drawn correctly set back from the land boundaries the correct distances.

c. A driveway from the street boundary showing access to each t/house.

d. Visitor car parking areas.

e. An Plan of Elevation that shows you that all townhouses are either one level (on ground), two or three level.

Remember these plans are not drawn in detail, because at this stage you are still finding out if the development is financially feasibility. so you don't want to go to a lot of expense.

At this stage all you need to know is:

1. Can I physically 'fit' four t/houses on the land?

2. When placed on the land, do they make for pleasant living?

3. Does the design lay-out conform with Local Authority Regulations?

4. How many square metres (square feet) do I have to build - houses, drivways, landscaping?

5. Will they sell?

From this information you can use the square metre (foot) figures and apply a building cost for each element in order to arrive at a building cost figure to use in your feasibility study.

To get these building cost figures you can get a Builder to give you a cost or you can engage a Quantity Surveyor to do it for you.

The first figure you used was $100,000; now you are going into a little more detail, to see if your proposed development is still viable.

Ideally you want your second construction cost figures to equal or be less than the $100,000 figure.

Assuming your proposed development is still financially viable, you will make a Development Application to the Local Authority.

In preparing this application, more detailed plans are prepared that can be costed 'in more detail' for construction purposes, to ensure that you are still within the cost parameters established above.

Once your Development Approval is achieved, you will engage design consultants to prepare detailed design (sometimes called 'working drawings').

These plans, as well as the specifications, will contain all the information a builder needs to give you 'The Building Cost."

To ensure that the builder gives you a correct figure and not an 'inflated' or 'deflated' one, you can engage a Quantity Surveyor to check the builders' prices.

Why an Inflated Construction cost?

Because business is booming and builders are flat out keeping up with demand for their services ... in other words, if he gets your job, he wants a good profit.

Why a Deflated Construction Cost?

Because the building industry is highly competitive and there is not much work around. So the builder "buys" your job with a low figure ... you're happy BUT the builder is not.

So he has your job, now it is his job to make a profit, out of a non profitable building cost.

He does that by examining every aspect of your plans and lodging a 'Contractual Variations' for anything he finds that is an error (in the plans), can't be built as drawn, changes you or the design consultants make. All these Variations are costed at a maximum profit.

He can also increase his profit by altering the quality of the products he puts into each house.

So how do you beat all this hassel ... get the right construction price ... everyone is entitles to a profit for his work. I have always operated on that basis and have never screwed contractors to the wall ... I regard them as "my partners" in our mutual success.

So you see that by following this process you are adding more detailed information ... sometimes called "Firming Up" building cost ... as you increase your committment to:

1. Buy the land.

2. Proceed to DA Stage ... and

3. Proceed to Building Stage.

There's a right way to go about all this ... and there's the other way and I sincerely hope you don't go down that ally.

In Residential Development Made Easy all this stuff is "Made Easy" - sorry I couldn't resist that ... I hope this information helps you better understand the process?

From the desk of Colm Dillon ...

Author of "Residential Real Estate Development Made Easy"

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