When looking at property development what kind of financial headroom do you give yourself?

[nmb]

When looking to develop property you need to calculate your costs to the minutest details and then give yourself some headroom and flexibility. What kind of financial headroom do you give yourself between the estimated cost of property development and finances available?

 

[KSH]

When looking to develop property you need to calculate your costs to the minutest details and then give yourself some headroom and flexibility. What kind of financial headroom do you give yourself between the estimated cost of property development and finances available?

Hi NMB. Tricky one actually and I personally think it depends on the level of uncertainty you have when going into a project. The more you have nailed your costs down, the lower the headroom you would need, but if you are unsure on any particular area, then you would leave yourself more headroom on that area. Some people work off a blanket contingency figure of 10% but I think thats a bit too much like guess work with no real basis to it. On areas of work where I have been uncertain before, I usually take the highest estimate I've had for it and use that, and then add 50% to that particular item as a worst case (just because I tend to be quite conservative!). Sorry if that doesn't help you - I guess my key point is - when calculating contingency, make sure you are focusing on the areas which you are unsure about instead of just applying a generic cushion to the whole project.

 

[nmb]

I often wonder why more is not made of penalty clauses if a contractor does not deliver what they promised at the price agreed. How many times do we see the cost of goods and services increase way beyond what was initially quoted. In some ways the contractor has you over a barrel because once they have started are you really going to terminate your agreement with them and start again with somebody else?

 

[KSH]

I often wonder why more is not made of penalty clauses if a contractor does not deliver what they promised at the price agreed. How many times do we see the cost of goods and services increase way beyond what was initially quoted. In some ways the contractor has you over a barrel because once they have started are you really going to terminate your agreement with them and start again with somebody else?

I think that's a really good point nmb. In reality it is often more practical to continue on a job with an existing contractor rather than replace them (even if they are being a pain or not doing the job quite correctly - assuming the impact is minor in the grand scheme of things).
Good guidelines I have found for employing a contractor include:
1. Make sure they are a member of reputable trade body
2. Ask to see if they carry an insurance policy and will warranty the work - and if so, for how long and ask to see if the will provide this in writing
3. Agree a payment schedule with them in advance, e.g. Upfront deposit of X% and then milestone payments in proportion to the amount of work completed. Plus then a retention fee of 5% or so (some people say 10%) which they will get once you have inspected the work and they have corrected any defects.

This way you have more control over them and the work. But I would suggest on smaller jobs, where you have found a workman you can trust, the above may be overkill

I'd be very interested to hear from others on what they think is the best way of managing builders and their costs as I think its a great topic....

 

[nmb]

Hi @KSH

Your suggestions are extremely useful but I was wondering how many people have tried them in practice and whether they have worked? I have heard many stories of contractors signing agreements with stage payments only to turn around further down the line and demand money for goods else they will stop work. What do you do in this situation? Time is money and the longer the development drags on the more money this will cost you.

 

[KSH]

Hi @KSH

Your suggestions are extremely useful but I was wondering how many people have tried them in practice and whether they have worked? I have heard many stories of contractors signing agreements with stage payments only to turn around further down the line and demand money for goods else they will stop work. What do you do in this situation? Time is money and the longer the development drags on the more money this will cost you.

Hi nmb. In all honesty, the only significant renovation work I have employed contractors for to date are; the replacement of a bathroom/toilet room, re-carpeting / reflooring a house, some external garden renovation work. In all cases the contractors used were very good, and the jobs were pretty much done under 2 weeks and so didn't justify multiple milestones. However, the structure we used was:
1. For the bathroom - paid for materials upfront (of which we bought quite a few) and paid the labour at the end
2. For external garden work - again we paid for materials upfront and labour at the end
3. Reflooring - paid all at the end
Thinking about it, perhaps we were quite fortunate with our contractors! If I do take on a bigger job which does require staged payments, I will let you know how it goes, but my earlier comment was more based on what I have learnt from others.

But regarding your comment on 'what do you do when they turn around asking for more money for goods' (and by goods I assume you mean materials),perhaps a way around this could be if you structure the agreement so that all the key materials for the job are your responsibility, and the balance of the smaller materials and labour are under the contractors scope. This way they cant hold you to ransom on the major components of the job. This arrangement may however require that you pay out more in the beginning to secure the goods.

 

[nmb]

I’m sure there are ways of protecting yourself from increased costs but from bitter experience I have found that many tradespeople make a significant return on the cost of materials as well as the work itself. Therefore, I am not sure whether they would be “willing” to give up this income stream which can be fairly lucrative?