The remodeling contract

The first place to watch for hidden costs is in your remodeling contract. Be sure to demand a fixed-cost contract that includes a detailed scope of work, a change-order policy, and a firm price that you’ve agreed to.

This type of contract does not include contingencies or allowances for “unforeseen” expenses, such as dry-rot exposed during demolition. It is the responsibility of the contractor to evaluate those possibilities beforehand and account for them in the contract.

If you don’t have a fixed-cost contract, additional work may add as much as 10% to your final cost — money you didn’t expect to pay. Similarly, a fixed-cost contract prevents paying unforeseen charges for building materials when prices rise unexpectedly during the construction process.
 
Those increases can be significant. Consider that between 2000 and 2009, the price of construction materials in general increased more than 36%, and 7.2% between 2008 and 2009 alone, according to the Bureau of Labor Statistics.

Specifically, recent fluctuations in big-ticket items such as structural lumber (up 63.6% within the first three months of 2010, compared to its 2009 year-end price), concrete (a 44.8% boost this decade), and asphalt roofing shingles (up 24% in 2008 and 18% in 2009), can hinder your efforts to stay on a financial track — and are reason alone to demand a fixed-cost agreement that locks in the cost of the materials for your project.

Be sure your contract has a change-order policy that spells out costs for any alterations to the project that you specify after the contract is signed. This protects the contractor, and also gives you a clear idea of what it will cost if you change your mind about aspects of the project.

Architectural fees

The cost for an architect to craft a two-story addition that integrates seamlessly into your existing home may be 15% of your total construction costs. If your budget is based solely on the cost of construction, you’ll need to account for the design fees as well.

Some construction outfits include design capabilities. These design-build firms fold the architectural fees into the construction budget, usually at a discount because you’re hiring them for the entire process. Nevertheless, you’ll still have to account for the cost of the design.

Related fees may include engineering services required by your local building authority, such as having a soils engineer evaluate steeply sloped yards, and areas where shifting or expansive soils are problematic. Specific costs vary, but additional testing runs $250 to $3,000.

Finance charges and loan interest

If you secure a loan for all or part of your addition, you’ll likely face loan origination and processing fees of about 1% to 2% of the total loan amount. The lender also may require appraisal and inspection fees, which will cost about $300 each.

In addition, any loan terms will include interest you’ll pay against the principal balance. As an example, let’s say you finance your $156,000 two-story addition project with a $115,000 home equity loan and $41,000 in cash. You decide to add those amounts to what you already owe on your existing mortgage.

If your existing mortgage is $160,000, the result is a refinanced mortgage of $316,000. A 30-year loan with a fixed interest rate of 5.15% will result in about $305,000 of interest paid over the life of that loan.

Increased insurance premiums

Your annual home owner’s insurance premium will (and should) go up as the result of any significant addition.

For reference, a $275,000 house with a $434 annual insurance premium will likely see that premium jump 50% or more, to about $650 per year, based on a $156,300 room addition. That premium is calculated with a 125% replacement value for the now-$431,300 home, which accounts for increases in construction labor and key materials costs — a calculation that should be revisited at the policy’s annual renewal.

Higher property taxes

Expect to pay higher property taxes when you add living space to your home. Typically, the value stated on the building permit application for the room addition will be added to your home’s valuation for the next tax year, thus increasing your annual property taxes.

An exact amount is difficult to estimate because other variables work into assessing the value of your home from year to year, such as fluctuations in the overall housing market. For instance, a 2007 room addition project in Boise, Idaho, that increased the home’s assessed value by 31% boosted its next year’s property tax by nearly 43%; a room addition project of similar value in 2002, however, increased that home owner’s property tax bill by only 15% the next year.

Landscaping repair

A two-story addition will no doubt affect your home’s landscaping. The new space itself will replace turf, shrubs, flower beds, and/or trees (and perhaps the cost to remove those features), while daily construction work — from foot traffic to heavy machinery and materials staging — takes its toll on what remains.

While there is no magic number for such costs, you can expect to pay hundreds to thousands of dollars to have landscaping restored around the sizeable footprint of a two-story addition. Limit the damage — and subsequent cost — by cordoning off a path to the job site and a staging area for materials. Also, create an allowance of several hundred dollars to put your yard in proper shape once the job is done.

Delayed decisions

Arguably your most important job as a client is to make informed decisions in a timely manner to help keep the project on track. That’s because some materials and products must be ordered in advance to arrive on the job site within a small window of the contractor’s overall schedule. Let those deadlines pass, and you risk delays or rush charges to make up the time.