How to Avoid the Dangers of “Cost Per Square Foot” Pricing
Updated: May 4
Anyone thinking of building a new custom home always wants to know... what is the cost to build a new house?
That is a fair question.
But... did you know the most dangerous question you can possibly ask is...
"What is the cost per square foot to build a house?"
On the surface this may seem like a fairly straightforward question. However, in practice it’s anything but. There are many factors that go into how a home builder calculates this cost per square foot.
If this number is not calculated accurately it is easy to accidentally create an inaccurate budget. This is where you hear nightmare stories of home building stories where home owners run out of money, end up significantly over budget, or even go broke.
Let's look at an example:
Let's say you want to build a 3,500 square foot home. You'd like a a fully developed basement, and a two-car garage. You chat with two different home builders. Here's what the information you get.
Custom Home Builder #1: Tells you the home will cost $350 per square foot to build
Custom Home Builder #2: Tells you the home will cost $250 per square foot to build
Your initial reaction? Home Builder #2 is less expensive.... right?
Well... it's not that simple. There are two important follow up questions you need to be asking:
Question #1: What Is The Multiplier For The "Cost Per Square Foot"?
WHAT IS THE SQUARE FOOTAGE?
In certain cities, (like Calgary), the real estate industry only refers to the "above grade" floors as square footage.
For example, if you have a "3,500 square foot home", that only includes the main floor and the upper floor. It does NOT include the basement. But when you're building a house, obviously there is a real cost of building the basement square footage.
In other cities (like Greater Vancouver), the real estate industry calculates ALL the developed square footage.
For example, let's use the same "3,500 square foot home" used in the example above. In Vancouver, the real estate industry also counts the basement. The total developed square footage would be approximately 5,250 square feet. (3,500 square feet of main floor and upper floor. Plus approximately 1,750 square feet of basement). Thus, in Vancouver, the same house would be referred to as a "5,250 square foot" home.
WHICH SQUARE FOOTAGE TO USE?
So now...back to the cost per square foot...Do you multiply it by the 3,500 square feet? Or the 5,250 square feet?
Great question. Unfortunately, the home building industry doesn't have any "standard" methodology of calculating this. And it does NOT necessarily follow the same methodology as the real estate industry.
Some home builders calculate your total budget using above-grade square footage, and some home builders will calculate using total square footage. There is no correct method, or incorrect method. There are just simply two different methods.
I know. This is seriously confusing. So as a homeowner, you just need to ensure you ask this question.... "How is the cost per square foot is calculated? Is it multiplied by total square footage? Or multiplied by above-grade square footage?"
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Question #2: What Is Included and Excluded In The Cost Per Square Foot?
DIFFERENT COST TYPES
There are lots of different costs involved in each home build. On a very basic level, these costs can be broken down into two categories:
Hard Costs, and
Make sure you familiarize yourself with these costs. We'll also be doing a future post on this topic. (Subscribe to our post here so you don't miss it) **Add link here to subscribe to post
Most importantly, make sure you know which of these costs are included or excluded when you're speaking with a home builder about costs.
What is the difference between Hard and Soft construction costs?
HARD COSTS include expenses directly related to the physical construction of your new home. For example, the materials and labour required to build your foundation, frame your house, your flooring, cabinetry, etc.
SOFT COSTS include expenses indirectly related to building your new home. Soft costs are mandatory to complete your project. So they need to be accounted for. But oftentimes, builders exclude some of these costs when talking about cost per square foot.
Clarify What's Included
Ask your home builder what’s included in their cost per square foot, and what assumptions they are making. If your home builder is not including soft costs as part of their estimate, that's not necessarily incorrect, so don't panic!
Remember, there is no "standard" way for home builders to calculate costs. Just make sure you are accounting for these costs somewhere in your budgeting.
Some common gray areas are:
Garage (also clarify what size of garage)
Basement (developed or unfinished?)
City permit fees
Level of interior finishing (basic, mid-high to high end?)
Asbestos abatement costs
New underground services fees (new water, sewer, underground services hookup)
The Final Costs To Build The House
So now that we've asked the two questions above, let's re-calculate the cost to build our example 3,500 square foot home with a 1,750 square foot basement (5,250 developed square feet in total)
Custom Home Builder #1: Says the home will cost $350 per square foot to build. He's confirmed this is multiplied by the total square footage of 3,300. The pricing:
Includes demolition and removal of existing home
Includes a triple garage
Includes a fully finished basement
Includes an allowance for basic landscaping
Includes City permit fees
Includes demolition of the existing structure
Includes a mid-high level of finishing (what you were looking for)
The total build cost for Custom Home Builder #1 is $1,155,000. (Calculation break down is $350 x 3,300 square feet)
Custom Home Builder #2: Says the home will cost $250 per square foot to build. He's confirmed this is multiplied by the total square footage of 3,300 (same as Home Builder #1). The pricing:
Excludes demolition of existing home (approx value $15,000)
Excludes the garage (approx value $60,000)
Excludes finished basement (approx value $150,000)
Excludes landscaping (approx value: $50,000)
Excludes City permit fees (approx value: $30,000)
Excludes architectural design fees (approx value: $30,000)
The total for all the above exclusions add up to $335,000.
The total build cost for Custom Home Builder #2 is $1,160,000. (Calculation break down is $250 x 3,300 square feet PLUS $335,000)
You can see that when all the costs are accounted for, the price of the home is essentially the same from both builders. Regardless of the fact that on the surface, the "cost per square foot" was significantly different.
Major Take Aways - Avoiding The Cost Per Square Foot Trap
In summary, here is how to avoid the "cost per square foot" trap when building your new home:
1. Avoid using "cost per square foot" method to talk about costs.
There are too many variables. Focus more on what the total final budget would be, instead of trying to break it down to "cost per square foot". For example, "my new home will cost me $1.2M to $1.5M" instead of "my new home will cost me $X per square foot".
2. Know What's Included and Excluded:
If you choose to use the "cost per square foot" method, make sure you understand HOW it is being calculated. And also ensure you know what's included.
3. Talk To Reputable Home Builder + Design Professionals:
Most high-quality, experienced home builders will take the time to explain how their costs are calculated. There are also a select number of design firms which can give you an unbiased opinion regarding the costs of your new home (like ours). It’s worth investing the time to have these in-depth conversations, regardless of which method you choose to use.
Our team is happy to help you with this.
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Phase One Design is a luxury design firm specializing in residential building design. With two studios across Canada (Vancouver + Calgary), Phase One works with homeowners across Canada and beyond. Contact us today for a complimentary consultation.