Don't Estimate Using Square Foot Pricing
If you've been in the residential construction industry for any length of time, you've no doubt encountered an architect or designer who has asked you to partner on a project and then asked you to provide square foot pricing by area of the project.
Recently, a client of mine reached out to ask how to handle an architectural partner questioning the estimate for a full gut renovation project on a single-family home. They had broken out the scope of work into square-foot pricing and applied that figure to the square footage for each floor/room in the home.
However, each room in a house isn't built in a silo and can't be priced out individually when you're looking at a whole-home renovation, nor can it be assigned the same square footage cost. And remodelers often run up against this issue because most architects and design partners don't understand how a project works from the builder's perspective. In their minds, they should be able to use a simple cost-per-square-foot formula to ballpark the price of a remodel or custom-built new home.
But no two remodeling or custom home building projects are the same, and you can't apply a "one-size-fits-all" approach to creating cost estimates for them. So how do you navigate this discussion with your professional partners and help them understand why you need to price each project independently of previous work - even if it is similar in scope?
What is Square Foot Pricing?
Square foot pricing takes the total cost to build the house and divides it by the total square footage of the home to create an average cost "per square foot."
Many industries, such as commercial real estate and retail stores, use square foot pricing to determine the value of a commercial space or as a key success factor for brick-and-mortar establishments to ensure they're maximizing revenue opportunities.
However, not every square foot is the same, and while this method has its advantages for the above-mentioned industries, it fails to accurately capture the overall costs of building or remodeling a custom home in several ways.
Why You Can't Use a Square Foot Estimate in Residential Construction
Every home is unique, as are the challenges involved in renovating it. So, basing the construction costs of renovating X house on the actual final cost involved in renovating Y house won't work.
This particularly holds true for remodeling projects that include older homes. These homes have different requirements than new houses and may have undergone renovation in the past, which can change the scope of the current project, resulting in a higher cost to remodel. All those characteristics of the existing home need to be taken into account during the estimating process.
It's Never an Apples-to-Apples Comparison
When an architect compares your estimate to the "cost per square foot" of their last project, they leave out significant details about that project that play a huge factor in determining the actual construction costs.
Knowing nothing about a previous remodeling project other than the square foot pricing means you don't have insights into many facets of the job, like:
Was the project profitable?
Looking at a project that was, say, $267/sq ft doesn't tell you how the project was estimated or billed, i.e., fixed cost or cost-plus. So you have no idea what the actual terms of the project were and whether or not the price included a healthy enough markup on material costs and labor costs to make it profitable.
You also don't know if the contractor lowered their price to win the bid and if they had to present the clients with multiple change orders to offset added costs. This situation happens when remodelers and custom builders don't allow sufficient time and space to estimate a project properly. Learn more about change orders here.
And if that contractor low bid the job just to have work in their pipeline and keep their teams busy, then they likely weren't focused on charging the right markup or pricing their work correctly in order to be profitable on it, so it's not fair to compare it.
Were quality materials, higher end interior finishes, and expert trade partners used?
A properly written estimate contains detailed information about the materials, specifically the interior finishes, being used and allows insight into whether or not those materials are up to the same standard and quality as those used in your builds.
Without seeing that information, you have no idea if the contractor used quality materials or sourced lower-priced subpar building materials and lower end interior finishes in order to come in on budget.
What about the level of expertise of the trade partners they selected? I remember a plumber once saying to me "there are lot's of ways to get water to the bathroom, but we'll do it in the neatest, shortest and most efficient way possible". When you're handed a square foot number, you have no insight into whether or not the trade partners hired were done so because they were the lowest price.
What level of warranty and after-service care is the builder providing?
As a professional general contractor, you stand by your work and warranty the materials and workmanship. That's why you insist on using high-quality materials that you purchase and install instead of letting homeowners handle that task.
That level of professionalism comes with a higher cost that includes a proper markup to keep your business running so you CAN be available for after-service care for years to come. Having no insights into a comparative project cost other than the square footage price doesn't allow you to determine if any warranty or after-service care is included in the final price. And if the price your estimate is being compared to is significantly lower, then chances are it doesn't - which is another reason why architects shouldn't want a low-bidding contractor for their clients.
Trade Partners Don't Price Work by Floors
When you're pricing out a remodel or custom build, your work will impact multiple floors, and there's always an interplay between those floors. Things like HVAC, electrical, and plumbing run through the entire house, not just a bathroom or a kitchen.
So when it comes to asking trade partners to price out their work, they will look at the overall scope of work and price the job accordingly for the entire time they need to be onsite and the totality of the materials they need.
This means that suggesting an estimate be broken out by floor is a flawed practice. Firstly, because of the above-mentioned interplay between rooms in a home, and secondly, because if you did price out something like electrical by floor or area, the cost would be disproportionately higher than if you priced out the entire job.
Projects with multiple items have a "scale of economy," which is a reduction in unit costs with increased volume. A $30,000 total cost for work in the basement, bathroom, and kitchen doesn't break down into $10,000 per area if they are done separately. If priced separately, the aggregated total would likely exceed $30,000 because a similar number of trips is required for even one of the areas.
It Complicates Your Estimating Process
When creating an estimate, your goal is to organize the information so that it is easy to translate to your trade partners and internal teams for efficient execution.
For example, if I've grouped materials required for the same trade, such as tile, then I don't want my project manager to have to reference several different sections in the estimate to aggregate the entire order. This would be counterproductive for them and for our trades when viewing the scope and pricing their work.
This leads to inefficiencies within the project's planning and execution phases, which have ripple effects throughout the project.
Handling Objections
When providing potential clients with a fixed cost or cost-plus estimate for their remodeling project, your goal is always to give them the most accurate price possible. That means spending a tremendous amount of time reviewing architects' or designers' plans, costing out each aspect of the job, and getting input from your trade partners.
So, it can be very frustrating when an architect or designer reduces your detailed estimate to a square-foot price and then questions that price.
Ideally, the best way to avoid this situation is to start your architect and design partner relationships with education on how your pre-construction process works and how you estimate projects, which is based on the following principles:
The project scope
The approach to the work
The cost of running a professional business
If you don't price your work that way, you're setting your client up for disappointment in the finished product and cheating yourself out of the ability to be profitable and stay in business.
Get to the Root of the Problem
If an architect is questioning your price and suggesting it should be a) priced by the square foot and b) lower based on pricing they have from other contractors for similar projects, a couple of questions should instantly pop into your mind:
Why aren't they working with that lower-priced contractor on this job?
How was the experience with that previous contractor? Is it a contractor with the same skill and expertise level?
What pain points in that project made you choose a new builder to quote/work on this project?
It's important not to call them out in front of the client, and if they are a new potential partner to you, you don't want to ruffle their feathers. But two decades of experience will tell you that if they are asking you to price the project, there's more behind the story than they are likely sharing with you.
The best way for you to approach this is by detailing the entire scope of work in your estimate and preparing a list of clarifying questions to show the value you bring to the process. Think of it as deflecting the question and demonstrating your expertise by asking the right questions. For more on how to prepare and present your estimates, click here.
That's Not How We Price Our Work
The easiest way to deflect the square foot question is to simply say, "That's not our model," and explain that an estimate is based on the quality level of both trades and materials to develop a price that matches the scope and conditions for each individual project to ensure longevity and durability.
This is an important point for architects to understand because if you use sub-par trades or lower-quality materials in order to come in at a specific price per square foot, the client experience suffers greatly, as does the finished product.
Caught in the Middle
Unfortunately, architects and design partners are often the liaison between clients and contractors. Being in that position involves understanding how each side works, but this is often not the case. That means having a well-defined scope of work to present to a contractor and ensuring that everyone is working with the same information.
While it does absolutely make sense to want multiple opinions on the price of a remodel, it's important to explain to them why that comparison needs to be made using the same criteria and not just an average number, like square foot pricing.
The Bottom Line on Square Foot Pricing
Whether it's for an existing home or new construction, every remodeling or custom building project is unique, and you cannot assume the costs will be the same based on someone else's home and experience.
Estimating a project involves so many details like understanding the full scope of work, where there is a crossover between rooms or floors, what economies of scale can be applied, the type and quality of materials and trade partners used, and what it takes to ensure you can deliver an outcome that the client will be satisfied with and that will be profitable for you.
That starts with helping architects and design partners understand your pre-construction process, including how you price your work and why you can't make any comparative assumptions, including applying square foot pricing.
I created the BUILD AND PROFIT SYSTEM to help remodelers and custom home builders create and implement rock-solid systems, such as pre-construction processes, to ensure they estimate correctly, charge what they need to stay profitable and build strong partner relationships.
Don't struggle to justify your pricing. Click the button below to join the BUILD AND PROFIT SYSTEM now.
