Cash Flow Planning for Big Home Improvement Projects
This month, we’re completing a full scale condo renovation project that began last summer with some exploratory conversations. Our first in-person site visit was in early September 2023 and our final inspection will be in May 2024. Across these nine months, there have been five primary types of expenses: design, project management, subcontractors, materials, and permitting.
Today, we’re going behind the scenes to talk about what to expect when budgeting for a big home improvement project. How do you know if the scope of work you have in mind qualifies as a “big home improvement project”? Assume that if you need to hire three or more different trades, will be working with an interior designer, or spending more than $50,000 in materials that your project meets the definition of “big.”
Design Fees
It’s wise to bring design expertise into your project as early as possible. Most designers will do hourly consults to help you sequence the big decision points and offer their perspective on where to source materials or approach layouts. This also helps a designer scope out a fixed-fee proposal to work with you as the project continues. Some designers may ask for a small deposit upfront. In general, designers will send an invoice every month. Payments are often made by ACH or wire. A check by mail may work and larger design firms may be equipped to receive payment with a credit card, although expect a 3-4% “convenience fee” to cover their credit card processing fee.
TAKEAWAY: Most design work is completed ahead of construction work as the documentation, dimensions, and materials are required to start the hands-on part of the process. Once your build out is finished, installation of furniture, floor coverings, light fixtures, and finishing touches will occur. Plan for most of your interior design fees to be somewhat split between the pre-construction and post-construction phases of your project.
Project Management
If you’re bringing in a general contractor to help hire and supervise the specialized trades (ie: paint, drywall, plumbing, electrical, carpentry, tile, stone, glass, etc), you may be asked to front a 25-50% deposit for the total tab of work. In this case, the general contractor will be assuming responsibility for paying their subs. A monthly statement or balance may be due as additional tasks are completed during the construction phase. While you’ll have visibility into the costs of each specialized trade, expect to be billed the cost of the service at a modest markup as well as a general management fee. Most payments for project management will be by check or bank transfer.
ADVICE: It’s reasonable to request that a small amount of the project fee (perhaps 5-10%) be held in escrow until you’re satisfied with the work completed.
Subcontractors
If you’re taking on the hiring and coordination work of finding your own subcontractors (or hiring out for certain tasks while managing others as a DIY), you’ll be working with small owner-operated businesses. These people are reliant on your timely payment and may invoice at completion of job or end of week. With prior negotiation, you may be able to make a bi-weekly or end of month payment. Sometimes cash may be an acceptable form of payment. Personal checks are often the preferred mode of receiving funds, though mobile payments (Venmo, Cash app, and Zelle) are an increasingly common option.
PRO TIP: Small businesses really appreciate timely payment. Don’t hesitate to ask about timing and preferred means of payment when you hire a tradesperson.
Materials
In general, you’ll need to complete most purchases for construction materials many months in advance of install. Even in-stock appliances can take 4-6 weeks to be delivered, depending on where they are warehoused. Items like cabinets or special-order furniture can take 4-6 months to manufacture. Items coming from abroad will often need to travel by ocean freight which can take 6 or more weeks to move from port to port.
If you plan to purchase your own materials, you’ll be able to pay with credit cards and earn cash back or points. Be advised that most custom items (ie: upholstered furniture, custom millwork, custom-drop light fixtures) will not be eligible for return. Other items have very short return windows or restocking fees that are a percentage of the purchase price. Plan to receive and “check in” all items as they arrive. You’ll need an empty garage or a spare area of your home to place items. Be aware of special requirements your building might impose (certificates of insurance or access fees).
CONSIDERATION: It’s possible that your interior designer or general contractor (and their affiliated subs) will handle all of the purchasing for your project. This is often the best scenario because designers and contractors receive trade discounts and have account managers with their biggest vendors.
Permitting
Your contractor can help with pulling the necessary permits from your city planning department. In bigger cities, separate permits may be required for different streams of work. For instance, San Francisco requires plumbing and electrical to each have their own inspections which are separate from general building permits.
The cost of building permits will be passed on by whomever obtains on your behalf. Sometimes a small markup will be added. It’s also possible to obtain owner-builder permits on your own. In this case, you’d pay your city directly, usually by check or credit card.
GOOD TO KNOW: Permits are required for commencing work and will usually expire 12 months after they are issued.