business advice | Mar 12, 2024 |
My profitability takes a hit every time a builder blows their budget. What can I do?

Dear Sean,

I am sick of builders going way, way over the estimates given to clients. On a recent remodel project in Boulder, the builder’s estimate was $1.2 million. Despite no scope creep—just following the design of the architect—the final cost of the job was $2.4 million. And even so, the builder’s quality and timeline were subpar!

The same thing is happening on a job I’ve got now on the coast of Oregon, where the clients just got a $55,000 bill for drywall—a bill they were expecting to come in at $20,000. Again, the change in cost from estimate to final bill was not due to any changes or additions to the plans by the architect or me. But when this happens, designers get the short end of the stick. I just had to completely change the project’s selections, scaling down because the builder went so far over budget. Because of rising costs, the clients are scaling back on what they spend with me.

When I have been upfront about this issue with clients and contractors, sharing my concerns that a budget wasn’t realistic, the builders treated me like a scab. The clients, meanwhile, are terrified and upset by this prospect, which turns out to be the truth. Sometimes a project will stop right then and never get done.

Isn’t there a basic formula that everyone should be aware of when calculating the cost to build in a particular region? Is it $400 per square foot for a medium-end build in Bakersfield? Or $750 per square foot for a high-end build in Boulder? I’ve called builder’s associations, but no one wants to talk about this with me. But if we know a home’s per-square-foot costs, why isn’t there someone willing to speak up about the realities of build and remodel costs?

I respect that everyone has a budget, no matter their wealth. I charge a flat fee, and when I deliver my proposals, all furnishings are itemized exactly. We also leave allowances on the quote for all accessories and costs like delivery and install labor so there is no gray area. Why isn’'t construction just as straightforward?

Losing Proposition

Dear Losing Proposition,

You are tilting at windmills. Yes, builders should be clear about their pricing and be held to estimates. However, their business model implicitly involves maximizing a client’s spending, as their profit comes in the form of a percentage of total spend. In economic parlance, they are trying to get to the point of ultimate price inelasticity—go right up to the breaking point of a client and then stop. Sometimes they miss and lose the job, but other times they get twice their estimate.

Unless you bring market power to the conversation, nothing you say or do will matter. Since you are never the one hiring the contractor directly, the only market power you bring to this dynamic is the ability to hire them again (and again). With the geographic breadth of your projects, it is unlikely that you can use that particular leverage to influence the contractor’s business in a material way. So, my advice is to shift your focus and process so that you become more effective at reining your share of the client’s spend.

First and most important to address is cash flow. You say you clearly lay out your fees and expenses in your proposals. However, it is also clear that you do not collect any of this money before the project begins, resulting in the diversion of your would-be fees to construction. That is self-inflicted pain. There is no reason why the design budget cannot be placed in an account you control, to be spent when you are ready to purchase furnishings. If the project collapses because of construction overruns, you can implement a break fee and give back the funds. Not the way it works? Says who? Your clients have agreed to spend what you have proposed. Why should they not have to pay for it?

In situations where you do not have market power, you can instead set out a realistic design budget and then set up systems to ensure it is respected. You clearly know construction and what it takes to build at the quality necessary to support your designs. If you collect the furnishings payments upfront, you can be an unbiased advocate for that process. The contractor will know what is available, and cutting into your budget will not be an option.

What I am really advising you to do is to shift your relationship and relative power in this situation where contractors need not respect you and your input. You are frustrated because your voice is quietest at the beginning of a project and loudest at the end. In fact, you are competition in the beginning, because your budget is available to those who will certainly make money on the increased spend (i.e., the architect and contractor). The only way to change the dynamic is to stress the importance of the beautiful result you will provide and the fact that you are the only professional who sees the whole picture from beginning to end of the project. For far too long, designers’ business models (yours very much included) have been too heavily weighted on the end of the project, so when the architect’s and contractor’s voices are loudest, designers get run over.

You know how important you are to the entirety of a project. Now is the time to change your process to reflect that role. We are in a time when technology is upending all aspects of design, architecture and building—to the advantage of interior designers like you, who are as versed in construction as they are in decor. The business relationships and business models of residential construction, architecture and design just have not caught up yet. They will. So why not go first?


Sean Low is the go-to business coach for interior designers. His clients have included Nate Berkus, Sawyer Berson, Vicente Wolf, Barry Dixon, Kevin Isbell and McGrath II. Low earned his law degree from the University of Pennsylvania, and as founder-president of The Business of Being Creative, he has long consulted for design businesses. In his Business Advice column for BOH, he answers designers’ most pressing questions. Have a dilemma? Send us an email—and don’t worry, we can keep your details anonymous.

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