Using Square Footage to Calculate Dollars per Square Foot

I worked in the construction management department of a bank for nine years.  In interacting with realtors, builders, and bank loan officers, the term “dollars per square foot” is often used to describe and differentiate between qualities of craftsmanship, levels of amenities, and geographical location of a particular new house under construction or for sale…all communicated through this one phrase.

During the last five years of working for this bank, I was given the task of evaluating new single-family construction loans in terms of the sufficiency of each construction budget line-item…lumber, framing labor, cabinets, HVAC, flooring, etc.

To create a more accurate method to evaluate each new loan, we produced “cost models” representing each geographical area by taking past recent completed loans in these areas, and dividing each budget line-item by the house square footage to create a bench-mark average consensus of the dollars per square foot for each construction activity and a global number for that geographical area…all in comparable units of dollars per square foot.

While calculating the square footage from the building plans from outside-of-wall to outside-of-wall, plus the internally, in-house agreed-upon convention of 50% for garages and balcony decks, we discovered that our total square foot calculations exceeded by about 10% the square footage given on the title page of the architectural plans.

For a construction management department…within a lender…evaluating the budgets for new single-family construction loans…getting the right dollars per square foot is important to avoid construction loans falling short of funds midway or at the end of the construction…requiring the borrower to come back to the bank for an increase called a “loan modification.”  Loan modifications add an increased element of risk to the overall bank loan portfolio…too many as a percentage of the total number of loans and the bank regulatory agency will note this negatively in its periodic audit…affecting the bank rating and stock value.

So…why this 10% difference in calculating house square footage?  The architect uses “living space”…inside-of-wall to inside-of-wall…as the criteria for calculating the house square footage.

I have never heard the official reasoning behind this approach, but we assumed one reason is that living space is a number that the home buyer can evaluate that leaves out the thickness of exterior and interior walls…unusable space for living.  But another convenient reason in terms of cost to the builder and the home buyer is that an understated house square footage based on living space…reduces city building permit and plan check fees when cities and counties accept this living space square footage number given in the architectural plans.

Because the actual construction costs of concrete, lumber, drywall, painting, roofing, and stucco plastering extend from outside-of-wall to outside-of-wall…a square footage total understated by 10% using living space…will artificially inflate costs per square foot overall and for every budget line-item…making it appear there is more money per line-item in the budget than there is.  From a real estate sales standpoint this gives the house a better appraisal valuation in terms of construction costs and amenities.

In effect, an apples and oranges difference is created which inaccurately skews the talking-point cost appraisal number higher by 10%…unless the caveat is disclosed that the figure given is based on living space…which is almost never done…because few realtors, builders, or bankers make the distinction.

Only a construction person would bother to calculate the real square footage on the plans…rather than accept the architect’s “living space” square footage…and this would only be done for the purposes of uniformity and reality in comparing construction costs in the banking industry…for evaluating new construction loan budgets…and for other interests related to construction costs such as cost estimating.

In closing, an example would be helpful.  Using round numbers…assume a 3,000 square- foot size house in the year 2000 in East Manhattan Beach in Southern California on the inland side of Sepulveda Boulevard, with a lot price of $500,000 (knock-down the old existing house), a projected new house sales price of $1,100,000, and construction budget costs of $300,000.

If we use these figures…the construction costs are $100 per square foot.  The builder, realtor, and anyone else involved in the marketing and sale of the new house will use this number to communicate the quality and amenity level of the construction.

But what if, after calculating the square footage of the new house using the criterial of gross square footage plus the convention of 50% for garages and balconies (they have real costs) instead of living space…the actual square footage is 10% higher at 3,300 square feet.

This new larger number as the divisor in the denominator correspondingly produces numbers throughout the budget and overall that are smaller than derived using the architect’s square footage.  The construction costs per square foot are now $300,000/3,300 square feet… yielding $97/square foot…not $100/square foot.

In a new construction loan budget, if the number for the line-item HVAC is understated by 10% at $18,000 when it should be $19,800 per the cost model…along with every other budget line-item like cabinets, countertops, finish plumbing, and hard surface flooring, for examples, not only is the potential for the need for a loan modification increased by 10%, but the value of the product has been inflated artificially from $97 to $100, in an industry where these comparative numbers are important, valued, relied upon, and evaluated by the consumer.

What is the Sweet-Spot Economically for Self-Perform Crews?

For the high-end, custom and spec homebuilder…there is a sweet-spot compromise between maintaining a mix of economical subcontractors plus in-house, self-perform tradespeople…as opposed to manning the jobsites with the optimum number of workers in order to complete each house on schedule.

I once worked for a homebuilder who maintained on the payroll over 50 people in seven different building trade specialties…plumbing, electrical, finish carpentry, painting, concrete flatwork, audio/video, and general labor…plus independent subcontractors in the other trades such as framing, drywall, HVAC, roofing, and flooring, for example.

The idea here…to self-perform some of the work…was to economize on labor costs, eliminate some profit and overhead that would otherwise go to subcontractors, maintain continuity of ways of doing the work and quality of workmanship, and exercise direct control over the self-perform crews in terms of scheduling and timely customer service repairs.

On the surface, these are in theory all excellent reasons to build and maintain a large self-perform workforce…but in practical application it is very difficult to keep self-perform crews busy for a 40-hour a week paycheck…and at the same time keep all of the jobsites manned at the optimum rate to complete the construction on time…within the tight constraints of a fixed and rigid numbers of detached houses being built at one time.

The duration lengths of time and the move-ons and move-offs for each building trade differ radically over the course of the construction of any house…but is especially complex for high-end luxury houses…spec or custom.

The only way to keep everyone busy yet also fully manned on every jobsite would be to have tradespeople who are capable of working in two or three or even four different specialty trades…which is not realistic.

The result of not being able to fully man each jobsite every day using mostly self-perform work crews…because of their specialization and the differing time durations needed for each construction activity…produces a result that some jobsites will sit empty for several days or more waiting for the needed crew to finish on another of the homebuilder’s houses a few streets away.

What seemed economical at the front-end of building the homebuilding company may not be so economical if construction loan interest costs for not completing houses on time…or dissatisfied customers must wait for their house to be completed two or three months late…as a result of the practice of the impossibility of fully manning every jobsite using predominantly self-perform crews that are inadequate to successfully fill the daily jigsaw puzzle of pieces needed.

Decision Bottleneck for Builders Regarding Interior Design

For the high-end homebuilder doing a combination of custom homes having a homebuyer client, and “spec” houses (short for homes built on the speculation they will attract a buyer)…and having an in-house interior designer or design group of two or more people…the inevitable and almost universal challenge will arise…of the single decision-maker at the top of the company becoming a decision bottleneck.

For the small-sized custom-home and spec builder this is not usually a big problem.  It stands to reason that the owner atop of the homebuilding company makes the aesthetic/artistic decisions regarding the myriad of small and large architectural and interior decision decisions…in coordination with the architect and clients as the case may require…that affect the bottom-line economics for each individual project and thus the success and solvency of the company.

However, when the size of the successful homebuilding company expands…it can reach a point where decisions that are repetitive should be standardized so as to minimize the number of individual decisions to a manageable quantity…otherwise the single decision-maker at the top of the company can quickly become a bottleneck of unaddressed lingering questions and issues that adversely affect the construction schedule.

This is best done in the proactive mode…long before a crisis emerges.

For example, if a medium high-end homebuilder always uses as standard a 3-1/2 inch wide casing around interior doors and windows…and often has wood paneling wainscot from the floor to mid-way up the walls in various hallways and rooms…then the wall-framing returns at each rough door opening should be a minimum of six inches whether or not this is called out on the plans.  Six inches minus 5/8-inch for the thickness of drywall leaves enough space for the door casing and wall wainscot…wood or ceramic tile…for the door casing to fit without it have be cut to a narrower width.  This should be standard knowledge in the field…repeated on project after project without having to ask the question…except in the exceptional cases where the homebuyer or the house itself requires larger width casing.

For a kitchen floor plan layout that is repeated every third or fourth house…the dimensions from the kitchen sink wall and from the kitchen range wall…to the repetitive sized island cabinet… should be standardized…so that the plumber and the electrician already know where to come up through the concrete slab with their pipes and conduit.

If the kitchens all have potfillers (water pipe coming out of the wall with swivel arms and a handle-valve for adding water to pots and pans directly at the kitchen range top) above the kitchen ranges…the height in inches above the rough floor elevation should be standardized.

In secondary bathrooms, the location, size, and dimension in inches above the rough floor for the shampoo niche rough framed opening…should be standardized.  The layout and dimensioning of the various valves for the bathtubs and showers should be standardized.  The width and the length of the inside dimensions of the minimum sized secondary bath should be standardized…so that a 2’-8” doors opening in front of a toilet does not hit the toilet.  The height of sconce lights and the top of mirrors in secondary baths should also be standardized.

These and twenty-five other things can be standardized long before a successful homebuilder grows to the point that the decision-maker at the top of the company becomes an information bottleneck.

In-House Interior Design

One of the pitfalls of having an in-house interior design person or small group within the office staff for a high-end custom homebuilder…is that if many of the architectural decisions and most of the interior design decisions are managed from within the homebuilding company…the homebuilder then also owns the myriad of “internal” RFI’s (requests for information)…which if not addressed in an organized and systematic way can quickly snowball into questions and issues that delay construction operations in the field.

The standard, arms-length arrangement of owner/architect/general contractor divides up the varied duties, roles, and responsibilities into relatively clear lines of demarcation.  Questions from the construction regarding the design plans…or requests for missing information in the plans and specifications…which arise during the course of the construction…are handled through RFI’s from the general contractor to the architect and/or structural engineer, for example…which are then individually monitored for timely response by the general contractor.

RFI’s which have not been answered that might adversely affect the construction schedule are communicated to the owner…often during the weekly owner/builder meeting…the owner then contacting the appropriate design professional regarding the particular question or issue.

The point here is that if the owner (“spec” homebuilder and/or custom homebuilder) is also generating a large portion of the architectural information…moving walls, changing layout, moving interior doors, etc., and all of the interior design information (prior to finding a homebuyer or in coordination with a homebuyer)…then the owner/homebuilder and the designer…parties one and two in the standard arrangement described above…become combined into one unit and there is no outside entity to send questions to other than internally to itself.

The procedure of sending an RFI to the design team and expecting a prompt reply…no longer exists.

In this arrangement…which seems on the surface to be beneficial in some areas such as keeping the artistic decisions consistent with the opinions of the homebuilder and his or her in-house staff…and the ability to better control the homebuyer client without the influence of a third-party, outside interior designer having contrary opinions…must be accompanied by a serious and thorough internal system of policies, procedures, control spreadsheets, and regularly scheduled office staff meetings to insure that field questions are being answered as quickly as they would otherwise be if sent out to an outside design team of the architect and engineers.