What is the difference between a budget and a cost estimate? Your budget is the amount of money that you are comfortable spending on this remodel. A cost estimate is the value of all of the materials and labor that will have to go into the project in order for the work to be completed by a contractor. It’s your designer’s job to make these two numbers, which may be far apart when you begin dreaming, match up by the time the construction drawings are completed.

BUDGET ISSUES

When you set a budget for a remodeling project, there are several things you ought to keep in mind.

• The first is to be sure that you’re investing your remodeling dollars for maximum return on your investment – whether that return is tangible (an increase in the market value of your home) or intangible (a living environment that makes you happy). Most people find a balance between the two, leaning toward cash return if they intend to sell within a few years, or toward customizing to their personal tastes if they intend to stay a while.
  
  
• The second is to be careful not to over-improve your home without regard to the value of neighboring properties.

TESTING THE ANTICIPATED RETURN ON THIS INVESTMENT

Determine how this project might affect the value of your home. A good realtor can tell you what your home might sell for today, and if you describe your plans to them they may be able to guess what the property will be worth after the renovation is completed. 90% of the difference between those two numbers can be a good place to start when you set your budget. That 10% discount allows for fluctuations in the real estate market that may be beyond your control.

The purpose of remodeling is to customize your space to suit your lifestyle. If you were to sell the day the work was finished, you would still probably only recover about 75% of your investment because your buyers may not like what you like. The more you customize, the less you’ll get back in increased resale value.

HOW LONG DO YOU INTEND TO STAY?

Another way to set a budget is to ask yourself how long you expect to be in this house. The longer you’re going to stay, the less important the cost of your changes will be because you will have "used up" the value of the improvements by simply enjoying living there, and in 15 years you’ll probably need to think about remodeling all over again … or a buyer will. But if you know that you’ll only be in this home for a few years, you’ll be more focused on being able to cash-out on this investment than on enjoying the space and leaving the money behind when you go. For short-timers, calculating the budget is all about getting your money back.

KEEPING THE REMODELING COSTS REASONABLE

You might also want to think about the current value of your home and the percent of the space in that home that you’re going to remodel. Divide the total number of square feet into the total market value of the home, and try to keep your remodeling costs lower than the per-square-foot value of the area you’re remodeling.

HOW IMPORTANT IS THE AREA YOU’RE REMODELING?

Think about what percent of your time you spend in the rooms you’re going to work on. If you spend 20% of your waking hours in your kitchen because you love to entertain, then it will be important to you that this workspace allows you to operate efficiently and the intangible or happiness return will be more important than increasing the market value of the home.

DON’T SPEND MORE THAN YOU PLAN TO

However you set your budget, set it in cement. Don’t be flexible about your spending.

Once you’ve determined what your Total Project Budget should be, set aside 10% of that number for "soft costs" —professional fees such as loan closing costs, home inspection fees, design fees, and others. The remainder is your Total Construction Budget.

Take 20% from that Total Construction Budget to cover you when the contractor opens up the walls and the floors and finds a few surprises. Don’t give up this 20%, no matter what, during the contract negotiations. The remainder—80% of your Total Project Budget—is what you can spend on the construction contract ... and so it is also your design budget.

As the job progresses, and you pay the banker his closing fee, the designer her design fee and the attorney for reviewing the construction contract for you before you sign … and then you begin finding out that you have termite damage in your floor framing, that the squirrels ate the wiring in the attic, and that a small plumbing leak behind your kitchen sink has rotted half of the kitchen floor, you’ll still be able to stick to your budget by using your contingency funds.

MORE INFORMATION

You’ll find lots more information about the home remodeling process in Managing a Renovation: Staying in Charge and Out of Trouble, our friendly and comprehensive homeowner’s guide to remodeling project management. Download the table of contents and a sample chapter, or go to the order form to purchase it.

We offer ready-to-use construction forms, including a complete remodeling contract, in our Bookstore, as well. Have a look.

And, you may want to look at our list of More Resources for some great design ideas.

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