This article was published more than 2 years ago
It’s fairly standard for a general contractor to charge 20 to 30 percent over actual home-construction costs to compensate themselves for their services. So that often leads to the question: Can I save 20 to 30 percent on the cost of my home if I build and act as my own general contractor? The short answer is yes, it is possible. But the reality is you probably won’t save much and you’re assuming a lot of risk.
It sounds easy enough. The general contractor just pretty much compiles bids, orders materials and schedules the work. Theoretically speaking, anyone could do that and if you did that work yourself you should save that 20 to 30 percent. But here’s the catch: That’s a markup on the general contractor’s costs and their costs are lower than yours.
Why are the general contractor’s cost lower than yours?
Subcontractors are going to stick it to you. General contractors have established relationships with their subcontractors and tradespeople. The subs know what to expect on a project if they know the general contractor. They know if that general contractor is competent and fair. They don’t know that about you.
Subcontractors largely expect that an owner-builder doesn’t know what they are doing. To them, your job is probably going to be more work and more risk. They will easily charge you $25,000 but only charge a good regular customer $20,000. You just got charged 25 percent more and now you have to do all the contracts, oversight and coordination. Congratulations.
You’re probably going to way overspend on materials. It’s not the price of the materials — it’s the selection of materials that is probably going to get you. You’re starting from scratch. You literally have to select and purchase thousands of items. So you’ll go to the only places you know: the big box stores. You’ll sit with salespeople who will put the top-of-the line items in front of you. You’re going to wear out and just go with the expensive stuff, buying a $1,100 bathtub when a $300 bathtub would work just fine. You’re going to buy the $30,000 kitchen cabinet package when the $10,000 package would be nearly as good. In short, you’re going to spend three times the price for maybe 25 percent better quality, if you’re lucky. And you’re never going to see the resale value for those items.
Granted, a custom home builder general contractor is not going to talk you out of a top-of-the line cabinet, but in the initial bid they already have a lot of the materials figured out and priced them as tight as possible to win the job. That reduces the items you can drastically over pay for.
Even if you don’t overspend on the materials and labor, you’re not out of the woods. The odds are you’re going to overbuild. Even contractors do this.
Those home plans you downloaded are probably expensive to build. That fancy footprint with the popouts and the gables — it’s beautiful, but it creates a complicated foundation and roof. It’s more difficult and time consuming to build. It’s also more likely to have failures and air leaks, and it will probably waste more material. It all adds costs. The cheapest home to build is a square home. Every additional corner complicates construction and adds cost.
Even if your plans start out modest, you’ll probably add little things here and there. The individual changes will be cheap but by the time you’re done you’ll find you’ve tacked 10 percent onto your home costs. To be fair, a contractor is not going to help you with this. In fact, contractors are notorious for encouraging costly change orders. But the big builders analyze the cost of their plans. Cost and time are considered at every corner of the planning and construction. Change orders are your worst enemy in every situation.
You’re going to make costly mistakes.
When you’re the general contractor, you’re assuming all of the risk, and there’s a lot of risk. If you hire an electrician who takes your money and runs, you’re probably going to eat that cost and pay another electrician a premium price to come clean up the mess. I always get an inner chuckle when people tell me they’ll just sue the contractor. Have fun with that.
And time is money. You’ve got to live somewhere while you build, so you’re paying rent and interest on a construction loan. A mistake does not need to be catastrophic. You can die by 1,000 cuts. You have to be on top of the project at all times and anticipate the next step. If you don’t have the materials on site when they’re needed, or if you haven’t scheduled the sub then those delays can build and build. Interest costs pile up.
It is really hard to compete with the subdivision home builders in our area. Building lots cost hundreds of thousands of dollars. The large builders buy thousands of acres at a time and subdivide them down as small as possible. They analyze the costs of the plans and buy materials in huge quantities. Subcontractors fight to win their business.
The land is a huge part of the project. The dirt costs seem to be pretty close to 50 percent of the project costs for the infill or custom home. It’s very easy to over spend on land. You can easily waste all of your potential savings before you ever break ground.
The bottom line is that most owner-builders are probably not going to save any significant money, but they are guaranteed a lot of work and anxiety. Don’t try to build a home to save money unless you have a lot of construction experience. Build a custom home because you want a unique home. Whether you have a general contractor involved or not, you’ll be lucky if your custom home doesn’t end up costing you more than it’s worth when it’s all done.
If you do try to build a custom home then do not take it lightly. The process takes a lot more than just simply filling out a calendar and ordering supplies.
Justin Pierce is a real estate investor and real estate agent who regularly writes about his experiences buying, renovating and selling houses in the Washington area.
Read more:
Keep a construction journal on a home renovation project
Here’s why it might not be so good for small-time home builders this year
How to launch yourself into real estate investing
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