Residential Renovation Budget Reserves

The process of generating a Resource Breakdown Structure from the Tasks arising from the Work Breakdown Structure provides an opportunity to identify best, mid- and worst case scenarios. The execution of the task may go exactly as planned, be easier than planned, or much more difficult than planned. The factors that contribute to this variation of outcomes are risk factors. Every task carries a certain degree of risk. Certain tasks, that are mission critical to subsequent tasks and thus affect the project schedule, are seen to have higher risk.

Contingency Reserve

Cost estimating for tasks includes assessing for risk. Risk is quantified as an amount that would be needed to mitigate the risk should it arise. This amount is calculated as a contingency reserve. Each task is assigned a contingency reserve depending on the qualities and characteristics of the task.

In residential renovations it is typical to assign a global contingency reserve to the amalgamated roll up of costs per task. However, this can be a problem because it may artificially inflate the estimated budget for the project. It can also result in a less than diligent analysis of tasks for risk. In this case, even though a global contingency reserve has been applied to the estimate, it may not actually be an accurate assessment of risk, and can even fall short in a high risk renovation project. In addition, when it comes time to assess individual tasks and work packages for cost performance, without an accurate assessment of risk, it is impossible to know whether the task or work package performance met or exceeded their specific cost threshold.

Management Reserve

In project management the management reserve is a fund that is available to the project sponsor for unexpected issues not accounted in the WBS and RBS amalgamation. These are funds over and above project plan funds and contingency reserve. In a residential renovation, the homeowner would plan on having a management reserve fund. This fund would only be used if the project was in serious difficulty and a review of project costs revealed it would be appropriate to bring it into play. It is recommended that the amount in the management reserve is only known to the homeowner. There is a tendency for renovation project costs to balloon to consume whatever funds are available. The management reserve cannot be considered part of regular project funds or even contingency reserve.

 

Project Cost Policies

Residential renovation projects need clear policies for how project costs are going to be controlled and monitored. For example, it might seem like a savings to make a large purchase of building materials at the beginning of a project and have them delivered by the building supply truck. However, the cost of having those extra materials stored on site has to be factored in. Who is responsible for protecting them from the rain? Are they stacked in one place until they are ready for use or will they have to be moved to make way for a predecessor task? Are they secure? Or are they an invitation to thieves? What happens when packaging gets wet and falls apart and now there is a pile of nails getting rusty because the box fell apart?

No matter how much effort is put into trying to bulk purchases, the fact is that someone is going to be going to the building supply at least once, and more like twice, a week. It is worth planning to make more frequent, smaller purchases for materials that are going to be used immediately rather than loading up the site with materials that aren’t going to be used in the next week, or even month.

Spending on a residential renovation is typically controlled by the general contractor under the authority of the homeowner. Usually, but not always, there is an estimate that is used to rationalize expenditures for the project. Sometimes expenditures and acquisitions are acted on outside the formal estimate because circumstances have changed and unplanned purchases need to be made. This is where a homeowner can have great difficulty controlling costs on their residential renovation. A project manager would be very helpful to the homeowner in the area of cost control and monitoring. A formal change order process would take care of unplanned expenditures. Allowable Spending Limits and Spend Authorizations would take care of the problem of overbuying materials ahead of their scheduled use.

As part of a formal project management plan, the project manager would have full oversight over project team member’s spending, including spending by the general contractor. The project sponsor, which in this case would be the homeowner, would monitor the project manager’s performance managing project costs.

Monitoring and controlling project costs would be based on the WBS work activities. Allocating project costs to WBS tasks allows the homeowner to easily see the percentage of costs in relation to deliverables and work activity. Timely analysis of costs in relation to WBS tasks makes it possible to track which activities have the greatest cost impact on the project. This information can be essential when it comes time to make decisions for budget allocation and cost management.

Spending limits would be based on the amalgamated Resource Breakdown Structure in relation to Work Breakdown Structure tasks and work packages. These can be rolled up to the level of Deliverables to make it possible to see whether any changes need to be made to scope, time, cost or quality as the project unfolds.

In a residential renovation, authorization for spending would typically reside in the general contractor in consultation with the homeowner. Often the homeowner, when confronted with cost information and decisions, has a hard time knowing what is the right decision to make. This is especially true in situations where there is a technical difficulty that requires additional resource expenditures. For example, a common dilemma a homeowner faces is whether it is more cost effective to remove an entire structure and build new, or remove part of the structure and build partially new structure to match. In renovations, there is always an interface between new structure and existing structure. The dilemma comes when the cost of a partially new structure almost matches the cost of a wholly new structure due to technical difficulties. Within the context of a formal project management plan, this situation would have protocols for investigating the relative pros and cons of either solution so the homeowner can make a decision based on research and data, rather than a vague idea of what is going on.

Cost policies formalize cost management practices. Cost control: should it be centralized with the project manager? Or decentralized to the general contractor and other construction professionals? Preferred vs competitive pricing: If the contractor has a contractor discount at the building supply but charges a contractor fee on every purchase, is the homeowner getting a better deal than just purchasing from the building supply themselves? When is it better to have a preferred purchasing arrangement instead of a public competition? Payment terms and payment authorizations: what are the terms for payment – immediate, net 30 days, approval, verification to pay? Policies for auditing project costs: What documents are required to be submitted for verification and auditing? Cost over-run and approval: If the project is over budget what changes are made to authorize and control additional funds?

Purchasing for residential renovations is generally pretty straight forward. Resources for tasks are acquired and used to complete the task. It is useful to have purchasing policies in place to ensure acquisition of resources is easily tracked to tasks instead of having a mish mash of items purchased on one invoice when it could easily be divided by task. When resources are purchased by task, there is going to be a commensurate cost for the contract labor to use the materials in the execution of the task.

Life Cycle Costing of a Residential Renovation

Life cycle costing refers to the costs over the entire life of a project, not just planning and execution. A project may be relatively inexpensive to execute but entail high ongoing operating costs. For example, a heritage restoration project may refurbish the original wooden windows from a heritage house. There may have been cost savings by refurbishing the original windows rather than purchasing new vinyl windows. However, the maintenance of these original wooden windows now involves annual cleaning and painting tasks in difficult to reach locations.

Project management of residential renovations needs to address life cycle concerns that will affect the homeowner after the renovation is completed. The project manager’s first concern is ensuring verified project deliverables have been accepted and the project closed down. The project manager’s overriding concern must be what is in the best interest of the homeowner with regards to the overall concept and description of the residential renovation project. If the project manager perceives that there are going to unusual or exceptional costs associated with maintaining certain components of the residential renovation after the project is completed, this information may lead the homeowner to make other choices during the planning process.

Life Cycle Costing Example

Analyze the costs of a residential renovation over the entire life of the project. For example, putting a new basement under a heritage increased the life expectancy of the house from 30 years to 100 years.

Construction costs $320,000

Annual maintenance costs (100 years x 500 per annum) $50,000

Periodic major infrastructure upgrades (100 years x 200 per annum) $20,000

Total costs $320,000 + $50,000 + $20,000 = $390,000

Costing a Residential Renovation

Direct project costs are expenditures for work done in the service of project completion. This work can include physical tasks (contract labor to implement project-related tasks); mental or intellectual tasks (project management to implement project management-related tasks); informational (professional services to provide architectural and engineering drawings); and knowledge (using trades, sub-contractor, and consultants’ expertise to develop a plan).

All project work on a residential renovation has associated costs. These costs may cover contract labor, materials and supplies, equipment rental, professional services, permits and fees, sub-trades and sub-contracts, and overhead.

When developing an estimate, historical data provides a starting point for predicting costs for a residential renovation. However, because every residential renovation is unique, there is a need to identify and price unique attributes for each case. Some of these unique attributes are going to be associated with: the age of the house and number of previous renovations; the original quality of workmanship and materials used to build the house; the cost of borrowing and the homeowners’ equity position in relation to the value of the property; the homeowner’s feelings toward the house and whether they are planning to live in the house or sell it after the renovation is completed. Thus, historical data can provide ballpark estimate data, but a detailed estimate will account for these attributes and other factors.

The Work Breakdown Structure (WBS) is used for developing a detailed cost estimate. In residential renovations, it is very important to develop a detailed WBS and Resource Breakdown Structure (RBS) for work on the immediate horizon. It is helpful to ‘bulkhead’ residential renovation work into manageable bundles of work. The idea here is that residential renovations are iterative, that is, work previously completed will affect subsequent work on the project. Breaking the work into manageable bundles means that detail estimates can be used for immediate work, while work further out on the horizon is not developed to such a detailed level as it will need to be revised once the current bundle of work is completed.

Breaking work into manageable bundles with detailed estimates developed through an interactive process of planning, implementing, monitoring and controlling will ensure each estimate bundle is as accurate as is reasonably possible. At the same time, valuable planning resources are not consumed developing detailed estimates for future work bundles that are only going to have to be revised after the current work bundle is completed.

Developing WBS and RBS for Residential Renovations

Residential renovations are notoriously difficult to predict. The nature of a residential renovation is that there are going to be new discoveries as the renovation proceeds. First, there are going to be new discoveries during the demolition phase of a task. The first step to implementing a renovation is to remove damaged or unwanted structure to assess repair requirements and then, second, to expose sound existing structure to build onto.

Second, once demolition has been completed, there is a design and layout stage wherein the attachment of new structure to existing structure is determined. The relationship between existing and new structure is critical. The existing structure has to be sound and in “an equivalent to new” condition. Until demolition has been executed to expose sound existing structure, the attachment of new structure to existing is going to be unknown. There are going to be new discoveries as existing structure and new structure are designed and laid out for a seamless attachment.

Third, new structure in a residential renovation has to comply to two sets of criteria that may or may not be contradictory. First, the new structure has to make a seamless connection to existing structure. Second, the new structure has to conform to current building code. Generally speaking, it is highly unlikely existing structure conforms to current building code. The challenge here is figuring out a design that ensures a seamless attachment between existing and new structure, and that the new structure conforms to current building code. There are going to be new discoveries as the existing structure and new structure are re-designed to conform to current building codes.

Developing a WBS for residential renovations is an extremely useful exercise. It forces the contractor and the homeowner to thoroughly describe the renovation plan. However, it is only useful to do a detailed WBS for tasks that are immediately upcoming. The reason is that after a task is completed in the WBS, it is likely to change the upcoming tasks that follow it. The WBS for a residential renovation has to be designed for constant updates and revisions as the project moves from one project bulkhead to another.

Similarly, the RBS is useful as an immediate planning technique. The greatest detail will be developed for the most immediate tasks. Broader RBS content can be generalized for WBS further out from immediate tasks. This would include predicting for significant resource requirements. However, any RBS predictions are going to be subject to revision prior to implementation due to the emergent nature of residential renovations.

Residential Renovations External Resources

In a residential renovation, the majority of expenditures are going to be for external resources. Acquisition of these external resources involve the principles and practices of Procurement. Procurement of resources involves some form of contract.

Key considerations for external resources in residential renovations include:

• Resource availability and quality
• Technology / Design considerations
• Resources capability, reliability, quality of work
• Resource pricing – fixed price, per hour, cost plus, lease, outright purchase

The Project Manager would work on the homeowner’s behalf to ensure the resources were delivered on time and defect free, and, ready to use (is there any preparation or set up?)

In the case of residential renovations, resources, such as an on demand hot water heater, may require routine maintenance by a skilled plumber. In other cases, such as the installation of a new furnace system, resources would include after-market support to ensure the system is working as expected, and to rectify any installation issues that would only become known after the furnace was in operation during normal household applications.

In general there is no question who owns the output generated by the resource. The output is now part of the homeowner’s property. However, in the case of solar energy systems, the output generated by the system is part of the electrical energy grid. Output of solar energy is delivered to the utility company, who, in turn, credits the homeowner for the ‘sale’. The homeowner owns the equipment used to generate the energy, but the utility company actually ‘owns’ the energy generated by the equipment.

External resources purchased for residential renovations may include product warranties, maintenance agreements, troubleshooting, and a renovation warranty.

Residential Renovations Internal Resources

Internal resources are those that exist with a company. In the case of a residential renovation, internal resources would be those that exist with the homeowner. For example, the homeowner may be an architect and plan on designing and drawing the plans for their own renovation. Even an unskilled homeowner can be an internal resource to their own residential renovation by committing to cleaning the job site every day and ensuring tools are put away, materials are stored, debris is removed, and the site is secure. Sometimes it is obvious what internal resources a homeowner can bring to their own residential renovation. Sometimes the possibilities for internal resources need to be discussed to determine what knowledge or skill the homeowner has to contribute to project success.

The benefit of using internal resources is that they do not require expenditure of project funds to acquire or use the resource. In addition, because the resource is internal to the homeowner, the homeowner has more control over the use of the resource. For example, a homeowner that commits to managing the site clean up everyday and keeping tools and materials storage in order, will have a daily opportunity to observe project progress. They will see how many materials were used up, where they were used, how much waste was generated, and what was accomplished toward completing project milestones. The daily cleaning and maintenance of the renovation site gives the homeowner an intimate connection with project progress and ‘where the money went’.

The challenge of using internal resources for a residential renovation is that they rely on the homeowner’s commitment to maintain a predictable level of contribution over time. This amounts to a part time job for the homeowner, and may be difficult to keep up after the initial enthusiasm of project start up passes.

If the homeowner can grasp the value of their contribution – both as a quantifiable savings in the expenditure of project funds, and as a qualitative feeling of connection to their residential renovation, they are more likely to sustain their commitment. At the same time, if they realize the added benefit their knowledge of their own renovation has on planning and decision making, they may even feel a real sense of participating and being part of the project team. It is important for the Project Manager to ensure that everyone who is working on the site extends appropriate respect and camaraderie to fellow workers, whether homeowner or not. This would be spelled out as a code of conduct for professionals working on site.

Estimating Activity Resources for a Residential Renovation

Resources are what is needed to carry out a residential renovation and create the project Deliverables. Resources go through two stages before they are available for project work. First, they must be identified. Second, they must be acquired. Resources can be sourced externally, from the local building supply or outlet, or, internally, from resources at hand or already on site. In the case of residential renovations, it is most likely that resources will have to be acquired externally.

It is extremely important to ensure resources are acquired for their particular stage of the project. When they are acquired too early project finances are tied up in inventory and the inventory has to be stored. When they are acquired too late the project is held up waiting for resources to arrive. In residential renovations this can lead to wasted labor expenditures as work moves ahead without adequate resources simply to maintain momentum on the project. Often this situation leads to backward steps to retrace or undo premature tasks.

The Project Manager will have a basic understanding of each required resource and be able to identify what resources will be needed as each sequenced work activity begins. The Project Manager needs to keep a running inventory of resources available on site, and also keep an eye on the project horizon, predicting what resources will be need in the near future.

A General Contractor may have a pricing advantage at a local building supply and purchase resources for a residential renovation in advance. The General Contractor might want to take advantage of reducing delivery charges by purchasing project resources in bulk, well ahead of their schedule time for use. This leads to storage problems on site, and the risk of materials getting damaged due to improper storage before they get used. For example, cardboard boxes of framing nails are delivered with rebar for foundation work. By the time framing starts the nails have been moved around and gotten wet. The box is falling apart and the nails are getting rusty. The same issue can happen with purchasing lumber. A lumber order goes in, and to make up the load for delivery, lumber for framing is ordered and delivered when the project is still in the early stages of installing shoring and building forms. Framing lumber has to be stacked and stored, taking up valuable worksite real estate and requiring tarping and maintenance simply to save a few dollars on delivery fees.

Resource management is extremely important for residential renovations. The work site is a residential property, not usually designed for construction activity. Expenditures for resource acquisition must be made in a timely, considerate manner, so as not to waste homeowner renovation funds, but to ensure work activities proceed on schedule.

A Resource Breakdown Structure is a visual representation of a project’s resources. In the case of a residential renovation, the resources would be specific for the scope of work described in the scope statement. Resources are arranged by category and type. I have never seen a Resource Breakdown Structure specifically identified for a residential renovation. Generally speaking, the resources are identified as part of the estimate, and the estimate serves as a de facto resource breakdown structure. However, this common approach neglects to specifically address resource-related project activity and leads to inadequate resource management.

The Resource Breakdown Structure is derived from the Work Breakdown Structure. It is also informed by past experience of similar projects. In a residential renovation, it is very important to spend enough time describing and defining the Work Breakdown Structure. It is through these processes of description and definition that the project begins to take shape and planning activities ensure a well conceived project for implementation.

The Work Breakdown Structure (WBS) is a composite of inputs from all project team members. In a residential renovation, that team might include the architect, engineer, lead carpenter, plumber, electrician, HVAC contractor, window and door supplier, concrete specialists, cabinet installers, building envelope specialists, insulation contractor, City inspector, drywaller, painter and landscaper. Each of these professionals will have specific technical expertise to offer for project planning and resource recommendations. Usually these team members are known and reputable professionals with a history of previous successful project completion. In some cases, new professionals may be needed to join the team. In this case, consulting these new professionals to develop the WBS and RBS can help discern who will be a good fit to add to the team.

A project, including a residential renovation, has no resources until a Project Charter has been created and a Project Manager has been named. The Project Charter and the Project Manager become the first project resources for the project. In the case of a residential renovation, it is not common practice for a homeowner to engage the services of a Project Manager to oversee the implementation of their project. However, the stories of homeowners ill served by General Contractors, whether by ignorance or design, are legion and fodder for numerous home renovation television programs.

It is possible that it is time to consider hiring a Project Manager with a specialty in residential renovations to develop the Project Charter with the homeowners before signing on an architect, engineer or general contractor. A Project Manager whose responsibility is to the homeowner’s interests rather than in the employ of an industry professional. That would truly put the homeowner in a new position with regards to empowering their management of their own residential renovation.