Understanding the visible and invisible costs of remodeling

Indirect costs, or overhead expenses, are not directly tied to a specific project but are necessary to run the business and support all projects. These costs are often less visible to homeowners but are essential to delivering a high-quality remodeling experience.

Salaries and Wages: Beyond the costs of on-site labor, design/build companies incur salaries and wages for office staff, including project managers, estimators, designers, administrative personnel, and marketing. These roles are critical for ensuring smooth project execution, client communication, business operations, and the future of the company. 

We’ve been in business more than 42 years, in part because we understand best business practices and pay attention to the six key metrics of a successful entrepreneurial operating system: Vision, Data, Process, People, Issues, and Traction.

Operating a design/build remodeling business requires office space, storage facilities, and a showroom. These spaces are necessary for meeting clients, offering them easy access to selections, storing/staging materials, and maintaining equipment. Costs associated with renting or owning these facilities include:

Rent or Mortgage Payments: Leasing or purchasing office space, storage facilities, or a showroom involves significant expenses.

Utilities and Maintenance: Ongoing costs such as electricity, water, heating, cooling, and regular maintenance are necessary to keep the business operational.

Insurance and Legal Fees: Insurance is a crucial component of any remodeling business, protecting against potential liabilities and risks. Common types of insurance include:

General Liability Insurance: Protects against accidents, property damage, or injuries that may occur during a project.

Workers’ Compensation Insurance: Required by law to cover employees in case of work-related injuries or illnesses.

Vehicle Insurance: Covers company vehicles used to transport materials, tools, and personnel.

Additionally, remodeling companies may incur legal fees related to contracts, compliance, and dispute resolution. These costs are necessary for protecting both the company and its clients.

To attract new clients and maintain a competitive edge, remodeling companies invest in marketing and advertising. Typically, this can be as high as 20%. Murphy Bros. has historically been between 1 & 2%. These expenses include website development, SEO, online advertising, social media management, print advertising, collateral material, signage, photography, and community sponsorships.

The construction industry constantly evolves, with new building techniques, materials, and regulations emerging almost constantly. To ensure compliance, attract the best people interested in developing their craft, and deliver high-quality projects, companies invest in ongoing training and education for their staff. Murphy Bros. has a continuing education policy that reimburses office and field employees for relevant course work they complete.

Regulatory compliance is a significant factor affecting the cost of remodeling projects. Minnesota has specific building codes, safety regulations, and environmental standards that must be followed. While these regulations are essential for safety and quality assurance, they add layers of complexity, unpredictable delays, and cost to remodeling projects.  

All remodeling projects must comply with local building codes and zoning laws. These codes dictate everything from the type of materials used to the methods of construction. To ensure compliance, projects must go through a permitting process, which includes permit and inspection fees.  Each city has its own inspectors and they determine their own timelines and interpretations of building codes.  Some cities are easy to work with and fast, while others are difficult and unimaginably slow. We once waited more than a year for the city of St. Paul to grant a permit to tear down a house for a rebuild.  In the meantime, the cost of goods, availability of materials, inflation, all continued to rise.

Permit Fees: Obtaining the necessary permits for a remodeling project can be costly, especially for extensive or complex projects. In Minnesota, permit fees can vary based on the project's size, scope, and location. They can also cost an enormous amount of time in waiting for typical government efficiency to bloom like some rare orchid.

Inspection Fees: Projects often require multiple inspections throughout the construction process. These inspections ensure that work is completed according to code, but they also add time and cost to the project. If work fails an inspection, additional costs may be incurred to make corrections and schedule re-inspections. Did you know inspectors cannot be sued if they fail at the job and miss something or give incorrect advice or direction?

Minnesota has specific environmental regulations aimed at minimizing the impact of construction on the environment. Compliance with these regulations can also add to project costs:

Waste Disposal and Recycling: Proper disposal of construction waste and recycling of materials is not only environmentally responsible but also mandated by law. However, it comes with added costs for dumpster rentals, transportation, and recycling fees.

Lead and Asbestos Abatement: Older homes may contain lead paint or asbestos, requiring special handling and abatement procedures. These processes are costly and require certified professionals to ensure safety and record-keeping compliance with state and federal regulations. The fines for lack of compliance start at $75,000 per occurance.

Safety Training and Equipment: Compliance with Occupational Safety and Health Administration (OSHA) standards is mandatory to protect workers on the job site. This involves regular safety training, purchasing personal protective equipment (PPE), and implementing safety protocols, all of which contribute to increased costs.

As part of Minnesota’s commitment to sustainability, there are regulations promoting energy efficiency and green building practices. Meeting these standards can involve higher costs and specialized engineering.

Higher Costs for Energy-Efficient Materials: Energy-efficient windows, insulation, HVAC systems, and appliances are more expensive than standard options. However, they offer long-term savings on energy bills and improve the home’s value.

Specialized Design and Engineering: Achieving energy efficiency or green building certifications often requires additional design and engineering work, which can increase project costs.

Despite careful planning, unexpected costs can arise during a remodeling project. These can result from unforeseen conditions, changes in project scope, or delays:

Hidden Damage or Issues: Once construction begins, hidden issues such as mold, rot, or structural deficiencies may be uncovered, requiring additional work and materials to address. Sometimes, such discoveries completely change the scope of a project and therefore the costs.

Client-Initiated Changes: Homeowners may decide to change the scope of the project mid-way, such as adding new features or upgrading materials. These changes nearly always increase costs and extend project timelines as they disrupt schedules and labor allocations. At any given moment, Murphy Bros. is coordinating a minimum of 20 custom projects. And what happens in one can impact them all.

Given all the direct and indirect costs, as well as the additional expenses associated with regulatory compliance and unexpected issues, profit margins for design/build remodeling companies are often narrower than homeowners might expect. Typically, net profit margins for remodeling companies range from 5% to15%. Our goal is 8% - 10% net profit.

As a design/build company, we strive to balance high repeatable quality and affordability. We understand that remodeling is a significant investment, and we aim to deliver the highest value possible, that enhances your home and meets your expectations. However, it’s essential to recognize that cutting corners on materials, labor, or compliance is not an option if we are to ensure safety, durability, and satisfaction.

We provide detailed estimates and breakdowns of all known direct costs before any agreements are signed. We do that to help you understand exactly where your money is going and why certain aspects of your project may cost more. However, indirect costs are more difficult to display and often cannot be known fully until the project is complete.