What Other hidden costs should I include in my rehab estimate?
When estimating Repair Costs for your Rehab Projects there are other hidden costs you need to consider such as the Project Location, Estimating Contingency, Contractor's Overhead & Profit, & Taxes.
Although this is not an industry term, we call these hidden costs 'Estimate Adders'.
There are 5 Hidden Costs you should consider that can significantly impact the cost of your Rehab Estimate, so you will want to make sure you include these costs if applicable to your project.
Contractor's Overhead & Profit
Our Estimate Databases include pricing based upon the National Average, but if you are in an expensive market on the East or West Coast such as New York, San Francisco or LA, repairs can cost 20 up to 50% more expensive than the National Average.
If you are rehabbing houses in a more expensive market, you will need to adjust your Estimated Costs to account for your market.
Here is a list of Location Adjustments for Major Markets on the West Coast, Midwest, & East Coast.
Remember, the most accurate way to estimate costs is to review all unit prices in our database and adjust the pricing to fit your local market and local contractor pricing.
Location Adjustment Example
A rehabber in San Francisco uses an National Average estimating database to Estimate Rehab costs for their project, which totals $50,000.
Since the Rehabber is an expensive market, they need to adjust their pricing to account for the premium by roughly 30 to 50%.
Location Adjusted Estimate = National Average Estimate x (1 + Location Adjustment %)
In this example, the same project that would normally cost $50,000 on average, would cost between $15,000 to $25,000 more in San Francisco.
Contingency is used to cover estimating errors or omissions or any unforeseen conditions on the project that can result in change orders and cost overages.
How Much Contingency Should I Include in My Estimate?
The contingency amount can vary widely depending on several factors:
Extent and Difficulty of the Scope of Work (Cosmetic vs Total Gut)
Risks of Unforeseen Issues or Repairs (Termites, Water Damage, Asbestos, Old Wiring, Old HVAC)
Age of the House (Old Wiring, Asbestos, Lead, etc)
Your Comfort Level with the Scope of Work on the Project
Your Experience Estimating Construction Costs
Your Experience Rehabbing Houses
If the project is an easy Cosmetic Rehab, with little risks of unforeseen repairs, and you have experience estimating costs & rehabbing houses, you may be comfortable w/ as little as 5% contingency.
However, if you are taking on a full gut rehab and have little to no construction experience or experience estimating costs you will likely need a much larger contingency to cover estimating omissions & unforeseen issues.
Is there a General Rule of Thumb for Contingency?
Generally, contingency will be between 5 to 25% of the repair costs, but you also need to evaluate the contingency as a $ amount to make sure the amount covers risks on the project.
For example, a 5% contingency on a $20,000 rehab would only amount to $1,000. If you end up having an unforeseen repair such as a furnace replacement, the repair could be up to $4,000 which would spend all of your $1,000 contingency and put you over budget by $3,000.
Honestly, if you are including a Contingency over 25% of the Repair Costs then that proves you aren't comfortable with your Estimate and you should seek help from a Construction professional to help you estimate costs for your rehab...
A Rehabber estimates their repair costs on a gut rehab to be around $60,000. For the most part, the Rehabber feels comfortable with the cosmetic portion of the rehab, but thinks their could be some risks associated with opening up the walls and creating an open floor plan. The furnace is also very dated and may need to be replaced.
The Rehabber knows a furnace is a new furnace is around $3,500 and thinks the additional rough-in work could be around $2,000. How much contingency should they include?
The answer is obviously subjective, but at the very least the Rehabber should include $5,500 and then maybe a little extra for any unforeseen issues. Here's some examples of how much 5%, 10% and 15% contingency would amount to as a $ Amount: $60,000 x 5% Contingency = $3,000 (Risky, doesn't cover known risks) $60,000 x 10% Contingency = $6,000 (Covers both known risks, but doesn't cover unforeseen issues) $60,000 x 15% Contingency = $9,000 (Should cover risks, but can they still submit a competitive offer?)
Each example shows the thought process of how you should evaluate risk on your projects.
Contractor's Overhead & Profit
The costs included in the Repair Estimator assume you will be hiring, managing and subcontracting the work yourself, so if you are an investor that is hiring a General Contractor to manage your project, you need to include costs for the Contractors Overhead and Profit.
General Contractors generally charge 10 to 20% of the Project Cost to manage the project.
Contractor's Overhead & Profit Example
A Rehabber estimates their repair costs to be around $60,000, but they plan on hiring a General Contractor to manage the project. The General Contractor charges a 15% fee on top of the Direct Project Costs.
Total Estimate = Subtotal Estimate + Contractor's Overhead & Profit Total Estimate = $60,000 + $9,000 Total Estimate = $69,000 In this example the Contractor is charging $9,000 to manage the project, so the Total Estimate would be $69,000.
Labor Tax a tax on the Labor Costs on the project. Some jurisdictions charge a tax on remodel and construction labor. Check with your local state and local tax jurisdiction to confirm if Labor Taxes will apply on your project.
Material Tax is the material sales tax you are charged at the store when you buy goods or materials for your projects. Check with your local state tax rules to find your local material sales tax rates.
Material Tax Example
A Rehabber purchased $20,000 in materials (pre sales tax) at Home Depot for a rehab project in the state of Missouri which is currently 4.225%. How much extra did Home Depot charge on the receipts for Material Sales Tax?
Material Sales Tax = Material Total x Material Sales Tax Material Sales Tax = $20,000 x .04225 Material Sales Tax = $845
Our Flipper Force Software includes a Repair Cost Estimator tool that can help you Estimate Repair Cost and manage your Estimate Adders on your projects.