This article is designed to help the contractor address the proper procedures and documentation related to allowances in a new home contract.
Methods to Reduce Costs in New Home Construction
This article describes methods to reduce the overall cost of construction for a new home. The new home construction industry was hit hard by the devaluing of real estate during the four year period of 2008 to 2012. To offset this devaluing of construction, contractors must create methods to reduce costs in new home construction.
For any company, profit is based on the risk reward concept. With construction, what should be the profit (reward) given the risk? What is a reasonable expectation given the industry and the particular business?
There is no single correct answer. The construction industry is divided into several significant branches. This article is focused on the residential contractor.
From the new home builder to the re-modeler, a reasonable profit given the risk should be no less than 9% AND this is net after a reasonable salary to the owner for his management role. This is the take home or actual bottom line profit; the amount after taxes. How do you derive such a figure? How do you determine the markup on the construction project to end up with this profit?
There are two primary methods of reducing costs of construction. The first is cost negotiation and the second is cost shifting. These two methods have several tools in each to achieve overall price reduction. The following describes each method and the respective tools within each method that you can use to achieve overall cost reduction.