How a Construction Budget and Change Orders Work in the Bay Area

Money is the part of a construction project that causes the most stress, and most of that stress comes from not knowing how the pieces fit together. This guide explains how a construction budget is built, how finishes are handled, what a change order is, and how much extra to plan for.

What’s in a construction budget

A typical project budget includes more than the contractor’s price.

• Design and engineering: architect, designer, structural engineer, and any specialists.
• Permits and fees: city plan review, permit fees, and sometimes utility fees.
• Construction: labor, materials, subcontractors, and the builder’s overhead and profit.
• Finishes: cabinetry, tile, flooring, fixtures, and appliances, which may sit inside or outside the contract price.
• Utility upgrades: power, water, or sewer work, if your project needs them.
• A cushion for the unexpected: more on this below.
• Living costs: temporary housing and storage if you move out.

In the Bay Area, construction typically runs $400 to $1,000 per square foot, depending on the complexity of the project, the quality of the materials, and market rates for materials and labor. When you compare bids, make sure each one covers the same items. Two numbers that look different may simply include different things.

Our contracts start fixed price

Our initial contract is fixed price. You and the builder agree on a total for a defined scope of work. That gives you a clear number to plan around, as long as the scope is written clearly and the plans are complete. Anything that changes the scope after signing is handled through a change order, described below.

How finishes are handled: two ways

Finishes such as cabinetry, tile, flooring, fixtures, and appliances are where budgets swing most, so we offer two ways to handle them. It depends on how involved you want to be.

1. Estimate with finish allowances. We include an allowance for finished materials at a standard, high, or luxury level. The allowance is a budgeted amount. If you choose something that costs more, the difference is added, and if it costs less, you get a credit.
2. You acquire the materials at your own expense. If you prefer to choose and buy certain items yourself, from suppliers you like, we work with you and coordinate delivery and installation.

Either way, we recommend suppliers we trust, including ones where we receive builder discounts. If you do use allowances, ask how each was set and compare it with the type of finishes you actually have in mind. An unrealistically low allowance makes a bid look cheaper than it is.

Budget a 10 to 15 percent cushion

Even with a fixed-price contract, we recommend setting aside about 10 to 15 percent on top of the contract price to cover changes and the unexpected. This is your own cushion, not a fee. If you don’t need it, you keep it.

For example, on a $2 million project, 10 to 15 percent is $200,000 to $300,000. Older Bay Area homes in particular can turn up conditions that weren’t visible during planning, such as utility upgrades or drainage requirements, and the cushion means a surprise is a planned expense instead of a crisis.

We strongly advise not using the cushion in the first half of the project. We rarely have to, because we pay close attention to every detail during design and permitting, and you’ll want it available for the surprises that tend to appear later.

What a change order is

Change orders are inevitable on construction projects. A change order is additional work the builder has to do because the plan changed, most often because you decided to change something about the design or architecture. A change might be moving a wall, upgrading a material, or adding a window. Hidden conditions and requirements from the city can also lead to a change order.

What a change order costs, and how long it takes, depends on two things:

• The size of the change. Swapping a faucet is not the same as relocating a staircase.
• When in construction you make it. A change on paper, before work starts, costs little. The same change after framing, or after finishes are in, can mean tearing out finished work and redoing it, with added cost and added time. Changes can also need approval from the city.

What a good change-order process looks like

• In writing, every time. Verbal agreements lead to disputes.
• Priced before the work is done. You should see the cost and any effect on the schedule before you approve.
• Tracked in one place. A running record of approved changes and the revised total.

The simplest way to control cost is to settle the design before construction begins. We use 3D floor plans, renderings, and virtual reality walkthroughs so you can see the home before it’s built and catch changes on paper. For more on this, see our decision calendar for a remodel.

Payments and your contract

Ask how payments are tied to progress, and verify current California requirements for home improvement contracts and deposits with the Contractors State License Board. Also ask about lien releases, which document that the builder and subcontractors have been paid for work completed.

Before you sign, make sure you can answer these:

1. What exactly is included, and what is not?
2. Which items are allowances, and what is each amount?
3. How are changes priced and approved?
4. What are the payment milestones?
5. What is the schedule, and what happens if it slips?
6. How are hidden conditions handled?

If any of these are unclear, ask for the answer in writing. We also cover this and more in our list of questions to ask before hiring a general contractor.

The takeaway

A budget is a plan, not a prediction. The goal isn’t to avoid every change, but to make sure every change is visible, priced, and approved before it happens, and to have a cushion ready for the ones nobody could have predicted. If you’d like to see how we handle estimates and changes on a project of your own, get in touch.