Affording a Renovation

When renovating, in addition to collecting soft data like personnel reputations, you should assemble the hard information, namely the estimates.

Managing the Money

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A renovation project requires more than the skilled handling of different sorts of people. Good management is always a matter of good decisions, no more, no less. Some decisions have to do with personnel, but many have to do with money.

Any successful manager—whether the person is managing a bank, a factory, or a construction company—knows that making good decisions depends upon hav­ing the right information at hand. The trickle-down of this principle for you, the homeowner, is that you’ll be poised to make good decisions only after you’ve done your homework. This means that, in addition to collecting soft data like reputations and weighing your own feelings and considerations, you’ve assembled the hard information, namely the estimates.

Before you sign up any contractors, collect all your estimates, loan docu­ments, plans, specs, and any other associated paperwork into one place. Designate a drawer, briefcase, or better yet, an entire desk to the work of managing your renova­tion. Make it your HQ during the process.

You’re going into business, so you need to be businesslike. Before most business people embark on a new venture, they’ll put on paper a budget that spells out the capital at hand, the anticipated costs, and whether the budget balances. You should do the same.

You don’t have to be a CPA to do this. In fact, one sheet of paper should be enough to summarize the entire process. Put your costs in one column, your rev­enues (e.g., cash on hand and loan proceeds) in another. Leave columns three and four blank.

The estimate sheet doesn’t have to be fancy, but it should be complete and accurate. Check the totals at least twice. You might also have one of your profes­sional advisers review it and your paperwork with you, especially if you’ve never pre­pared a budget before.

Take a financial precaution, too. After you’ve totaled the costs, add a line at the bottom for miscellaneous unexpected expenses. Then take 15 percent of the whole cost and add it to the original total. It’s a rare construction project that comes in at the price budgeted, no matter how carefully the process is managed. That addi­tional 15 percent will give you a cushion for cost overruns.

Having totaled all the budgeted expenses plus a fudge factor, does your bot­tom line tell you that you can afford to proceed? If not, you may need to look for other sources of money. Or you may need to rethink what you are spending.

Even if the budget does balance, don’t abandon your estimate sheet. As you sign contracts and pay bills, enter the real costs in the third column and keep a run­ning balance in the fourth. By monitoring progress in this way, you’ll be the first to know when your budget is in trouble, and you can take immediate steps to solve the problem.

If something comes in under budget, don’t get so excited you go out and spend the money on something else. Construction jobs always have ups and downs (building materials are commodities traded daily, so their prices change from day to day). Savor the good news, but expect some other expense to come along and swal­low the surplus.

Get at least three estimates for each job
Whether it’s the whole job or only one subcontractor’s portion of it, only when you have a basis for comparison will the outrageously expensive estimate stand out. And remember, the cheapest isn’t always the best. If one price is much less than the others, there’s probably a reason why.

Get your job estimated during the off-season
This won’t help in Southern California where construction work isn’t seasonal, but in the snow belt you may well get a better number from a contractor during the idle months when he wants to line up work for the first day of spring. Even if a contractor’s prices don’t vary much from season to season, he’ll almost surely have more time to devote to working out the estimate carefully and maybe even to helping you brainstorm about costs and technical concerns.

Receipts and records
Keep all your records together in a safe place. That means estimates, contracts, invoices, and especially canceled checks and receipts. Organize them into files if you wish, but at the very least keep an oversize envelope into which you toss all paperwork related to your renovation.

These records may be helpful in resolving any disputes and disagreements in the short term. When it comes to filing taxes for the year in which the remodeling was done, consult with your accountant regarding which expenses may be tax deductible. Among them might be certain closing costs; sales tax paid on large purchases (kitchen appliances, for example); and perhaps improvements that are work- related.

Later, when and if you sell your home, your receipts and check stubs will enable you to calculate the cost basis of your house for purposes of calculating capital-gains tax that may be due.