Construction Costs

Directs Per Square Foot?

Whether putting together a pro forma for a proposed project or evaluating actual costs, it is very common that the direct construction costs are discussed on a “per square foot” basis.  What can be tricky is that this metric has a lot to do with house size, structure, and the submarket demands.

Remember that directs are typically referred to as the vertical construction, meaning from the foundation through finishes (land improvements and soft costs excluded).  As a general rule, smaller houses cost more on a per square foot basis than larger homes.  The smaller home has the same expensive elements as larger homes, such as the kitchen, bathrooms, furnaces, electrical panels, and so on.  A larger home will tend to have more square footage of the cheaper space, such as the framing and drywall.  As a general comparison, a 1,500-sf home might cost $80/sf while a 2,500-sf home costs $70/sf.  In total dollars, the larger home costs more but the square foot metric is in reverse.

A second factor is the house structure.  Single-story homes tend to cost more because it has double the foundation and roofing as a 2-story home of the same size.  Three-story homes tend to cost more than 2-story homes, which probably has a lot to do with the structural engineering required, additional stairs, and how the backbone utilities are installed.  Attached homes tend to be costlier even though you would think that siding and windows are not needed on the common walls, but a lot has to do with structure and accessibility requirements.

Then you have the submarket requirements of your specific location.  A house in a lower priced, value location might be built for $55/sf while a house in an affluent area could cost $85/sf for the same square footage.  The affluent location may require a more intricate floorplan and upgraded features such as the appliance package, cabinets, and countertops.  This aspect is often coined as the “spec level”.

Experienced homebuilders have the actual cost data in their accounting system to assess what they have paid on previous projects and are usually very skilled at value engineering.  While the square foot metric is very handy in discussions, the total of the 40 – 45 subcontracts that make up the direct construction is really the truth behind what a house costs on a square foot basis.

Please share with us below any of your comments and questions.

John Kaye has over 30 years experience within the land development and homebuilding industries, having held senior management positions with The Irvine Company, Koll Real Estate Group, and Brookfield Homes. As a developer, John has overseen the land acquisition, entitlements, and development of master planned communities, residential tracts, urban infill sites, and land assemblages. His experience and skill sets include land acquisition, land brokerage, project management, market analysis, finance, and strategic planning.

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