Cost Anatomy of a New House

House build costs seem to have been on everybody’s lips since we lived in caves.

We take a look under the hood of one of Box’s recent projects to see where the costs lie in terms of materials, trades, council, design, consultants and even profit!

We often talk about a transparent approach when it comes to pricing projects. First, because very few companies have the full view of all the numbers in a project, so the real cost to build is often misunderstood or misrepresented. Secondly, when we open up the books it helps build all-important trust between us and our customers.

The Cost Summary

The house in question was completed in 2022 on the North Shore and took almost 11 months to build from start to finish. It is 211 square metres of floor space. Upstairs we have 3 bedrooms plus study including ‘main suite’ (with ensuite and walk-in wardrobe), family bathroom and separate WC. Downstairs we have a kitchen, living and dining area, second lounge, laundry room, single garage with additional storage, carport and another WC. We have about 46m2 of deck areas with a louvre pergola over part of it, and about 60m2 of driveway and access.

It is a ‘premium’ or ‘business class’ specification (full custom architectural being ‘first class’ and volume house builders being ‘Economy’ and ‘Premium Economy’.)

The Total Project Cost was $1,578,756 including GST. This included all pre-construction costs, site works, house and external works. The ‘build’ alone was $1,454,513. As a blunt cost/sqm rate the cost of the entire project was $7,482 dollars per square metre.

The breakdown of this is in the table below. All costs include margins and GST.

Design and Consenting Costs

Often the whipping boy of house prices, the cost of consenting and ‘pre-build’ work came to about 8% of total costs. Architectural design costs were around 5% of the total project (or 5.4% of all building costs), with 3% in consents and consulting. Consultants included a surveyor, geotechnical engineer, structural engineer and stormwater engineer. For a project this size, that’s pretty good value in terms of design costs (a quick bit of research finds this Westpac article on typical design costs).

Of course, if the house build cost had been $800,000 to $900,000, the consenting and consultant costs ($45,630 inc. GST) would have represented a much larger portion of total costs. However, the consents and consultant fees would have been lower, since consent fees are scaled with house build costs, and the input of consultants, particularly structural engineers, would have been lower.

When it comes to construction projects, in our experience it is not so much the cost of consents and consulting, but the length of time and uncertainty of timing when it comes to obtaining consents. This reduces the ability to hire and allocate labour and other overheads efficiently, leading to higher construction overheads (it is a similar problem for design-only studios). Timely processing of consents and a clear consenting pathway is what makes the difference.

Under Construction

Understanding Siteworks

One of the biggest areas of costs owners fail to budget for is siteworks. Under our definition, site works include demolition, preparation of the site, excavations, retaining walls, infrastructure and services, driveways and foundations.

This project was straightforward in the sense that all the infrastructure and services were already connected and the site was flat. We simply removed the existing house and plugged the new house into the existing connections (it sounds simple but is never quite that straight-forward!). There was minimal earthworks. The siteworks cost was below the average of around $150k – $200k. On steep sections with limited infrastructure and difficult access, we sometimes see this site works number grow to anywhere between $300k and $500k.

If you are contemplating a plot of land, it is important to talk to us in the early stages to get a feel for what this site works component may be, as it is often the make-or-break for a project. A cheap site usually means high site works costs.

House Build Costs

Now we get into the fun stuff. The cost of building the house itself was a little over $1,136,000 ($5,384/sqm) for an architect-designed, modern, high-specification home. We can break this down further:

This corresponds reasonably well to the overall ‘rule of thumb’ of 50:50 materials and labour on residential construction projects. ‘Trades’ includes plumbers and electricians, and these costs are usually also 50:50 labour and materials. It would appear skewed more to the materials on this project, but this is on account of some labour in the ‘Site & project management’ line. More on this later.

‘Other’ represents costs such as scaffolding ($30k on this project), site safety, fencing and numerous other incidental costs.

An area people often look for savings in is ‘F&F – fixtures and fittings’. You may save $20k here by having a cheap kitchen. But reducing the specification and hence cost by, say, 20% will save you $50k on a $1.5m project. Every little bit counts, the point is that there are often not the large savings in F&F that people may often hope for unless there are big cabinetry or expensive kitchen items.

The question is often: ‘So what is the difference between a house of $4k/sqm and $8k/sqm?’ The cost to build is very much dictated by the complexity of the design and quality of materials. A house that has very fine tolerances and exotic materials, such as in-situ concrete or engineered & exposed beams, full-height windows and doors for instance, is a more complex house to build and manage, with more expensive materials and higher trade costs. There are ramifications across the cost categories. An affordable house is often single storey using traditional construction techniques that can be carried out by less skilled (cheaper) labour, using materials that are in plentiful supply and easy to source. This usually means traditional timber frame with brick cladding, weatherboard and traditional gable, steel roof.

Unfortunately the architect-designed homes in magazines are not a good benchmark for affordability, with projects usually costing upwards of $10k/sqm as a total project cost.

External Costs

Although Siteworks costs were lower on this project, external costs were higher than we would usually expect on a typical project. Historically, external costs sit around the $80k mark, but with the details to the decks, covered pergola areas and garden works, this doubled.

House Build Costs

Running a Build Project

One number that may have stood out for some is the ‘Site & Project Management’ figure of almost 10% of the cost. This number includes the cost of off-site project managers (PMs) responsible for the scheduling and smooth running of the trades, materials, council and some client communications. It includes the cost of the site foreperson, who is responsible for the smooth running of the site, health and safety as well as often being ‘on the tools’. Finally, the cost includes some of the quantity surveyor time, who keeps an eye on supplier costs and relationships and processes changes and variations during the project.

To add some perspective to this number, if we assume an average rate of $90/hr inclusive GST (a QS and PM will be more than a site foreperson), that allows for 5hrs per day split between site manager, PM and QS. Given that the foreman will be full-time on the site for much of the work, we can see how the cost quickly adds up.

The modern builder is more of a project manager than someone who actually does any physical building. The industry is so tightly regulated that we now have specialisations for everything. Gone are the days the builder could install a roof, fix plasterboard or do basic plumbing. Everything seems to require a trade to install and sign-off, all coordinated by the builder who will supply materials and labour (and many large builders will subcontract this!). The site foreperson plays a very important role in this, so while the labour cost may look to be a little on the low side for an architectural build, the site foreman cost should be added to this as he will also be actively involved in construction work.

Builder’s Margin

The build (excluding pre-construction costs) includes a margin of $123,267 (9.79% of the construction cost). This figure is pretty typical for a Box project and goes towards overheads (including office costs), and profit. Our overheads are typically between 4%-5% of revenue, which leaves 4%-5% profit before tax. This profit needs to cover our long-term risk for construction projects (10-year liability under the Building Act), coming back to fix issues, material failures, insurance excess and other unknowns, as well as providing capital for growth, maintaining sufficient operating cashflow and finally paying a dividend to investors or shareholders.

It is difficult to benchmark these numbers, but the accepted rule of thumb tends to be around 10% margin. Also, here is a link to a 2018 BDO report that talks about gross margins in different building sectors:

Housing is a bit better at around 8% but due to its scale, housing needs a better margin.”

The default margin on a Master Builder contract is 15%, but it is not clear what this should or should not include. Many argue that a net profit of 4-5% is not sufficient to cover the risks as well as ensuring cashflow. The other general rule in construction is that upsides are limited, whereas downsides can be life-threatening!

If your builder isn’t allowing for sufficient margin to cover risks and cashflow, it’s likely he will be under pressure to fulfil his future implied warranties for 10 years under the Building Act.

The Grand Designs Problem

The biggest problem if you want to build a new house is finding a trustworthy source of advice around build costs. Whenever I hear someone on Grand Designs say, “tThis house cost us [insert unbelievable figure here]” I have so many questions! What did it not include? Was the price for the build only or for the total project? How many hours of labour or project management did you put in yourself or get for free? Have you consistently accounted for VAT, GST or whatever? Have you actually been able to keep track of all your costs?

If there is one thing I’ve learned over the years, there is no silver bullet to taking out big chunks of cost, unless you do a lot of the work and take on all the contract risk and liability yourself in order to save on labour and margins – which some brave people do, and you see some of the more successful sagas on TV!

The next best thing is to ask a close friend or family member who built within the last 18 months (back in 2015 does not count – not only has price inflation been a thing, but people often forget the painful financial facts). They may also not be able to give you a reliable number unless their accounting has been good.

Saving Money

There is a misconception that ‘shopping around’ for builders will get you the best outcome. This is the traditional adversarial approach of architects and builders. Unless builders are blatantly pumping up their margins because they have too much work, there should be little difference between them. Smaller builders with lower overheads should be offset by larger builders with a bit more purchasing power and better project management. If there is a large variation, this usually comes down to mistakes (tendering a building job to multiple suppliers and contractors is a complex and time-consuming task).

A smooth job is a good job, which means:

  • working with a builder at the same time as a designer so you get the best of design flair and practical knowledge from the outset. When it comes to saving money, a joint team of designer/builder is more likely to be able to offer the best advice
  • preferably work with a designer who understands building or is interested in building (have they ever physically build something themselves?) Otherwise the risk is the design tail wags the dog
  • Trust your builder. He/she takes the risk and liability. Designers and engineers like to push risk onto the builder (he is the one who will need to come back and fix things, even if it stems from a design error, which designers will usually debate)
  • We are biased, but having designers and builders under the same roof means that there is less likelihood of information not getting passed from one practitioner to another. And if it does, there is only one person responsible

And remember, the relationship does not just stop once the house is delivered. You need to be confident your builder will be able to honour their warranty obligations under the Building Act for the next 10 years if/when elements fail.

Conclusion

As we often say, “All projects go well until money gets in the way”. That’s why, if you are concerned about numbers, we compare your project to recent comparable projects as a good baseline for what you might expect.

Building an individual, never-built-before, custom house is always going to be the most expensive way to build. But if you’re willing to engage with us, and we can have upfront conversations around budgets, then the process and experience should be straightforward, fun, educational and memorable for all the right reasons.

By Box
13/12/2022

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