Using the Square Footage on Architectural Plans to Calculate Construction Dollars per Square Foot

            I worked in the construction management department of a bank for nine years. 

            In interacting with realtors, builders, and bank loan officers, the term “dollars per square foot” is often used to describe and differentiate between qualities of craftsmanship, levels of amenities, and geographical location of a particular new house under construction or for sale, all communicated through this one popularized standard of measurement.

            During the last five years of working for this bank, I was given the task of evaluating new single-family construction loans in terms of the sufficiency of each construction budget line-item: lumber, framing labor, cabinets, HVAC, flooring, etc. 

            To create a more accurate method to evaluate each new loan, we produced “cost models” representing each local geographical area.  By taking past recent completed loans in these areas, and dividing each budget line-item by the house square footage, this created an empirical bench-mark average consensus of the dollars per square foot broken down for each construction activity, and an overall global number for that geographical area. 

            This produced a reasonably accurate apples-to-apples comparison standard in units of dollars per square foot.

            When calculating the square footage from the building plans from outside-of-wall to outside-of-wall, plus the internally, in-house agreed-upon convention of 50% for garages and balcony decks, we discovered that our total square foot calculations exceeded by about 10% the square footage given on the title page of the architectural plans.

            For a construction management department working within a savings-and-loan making new single-family construction loans, getting the right dollars per square foot in evaluating the line-items in the construction budget is critical.

            New construction loans that fall short of funds midway or at the end of the construction, requires the borrower to come back to the lender for an increase called a loan modification.              Loan modifications add an increased element of risk to the overall bank loan portfolio.  Too many loan modifications as a percentage of the total number of loans, and the bank regulatory agency will note this negatively in its periodic audit.  This can adversely affect the bank’s rating and its stock value.

            What created this 10% difference in calculating house square footage? 

            The architect uses living-space (inside-of-wall to inside-of-wall) as the criteria for calculating the house square footage.

            I have never heard the official reasoning behind this approach, but we assumed one reason is that living space is a number that the homebuyer can evaluate that leaves out the thickness of exterior and interior walls.

            This approach identifies usable space for living. 

            But another practical reason in terms of cost to the builder and the homebuyer is that an understated house square footage based on living space, reduces city building permit and plan check fees when cities and counties uncritically accept this living space, square footage number as given in the architectural plans.

            The actual construction costs of concrete, lumber, drywall, painting, roofing, and stucco plastering extend from outside-of-wall to outside-of-wall. 

            A square footage total understated by 10% using living space will artificially inflate costs per square foot overall and for every budget line-item, because a smaller number in the denominator dividing construction costs will pump-out a larger dollar amount.

            This makes it appear there is more money in each line-item and in the aggregate budget than there is.  From a real estate sales pitch this gives the house an inflated value in terms of construction costs and amenities.

            In effect, an apples and oranges difference is created which inaccurately skews the talking-point cost appraisal number higher by 10%, unless the caveat is disclosed that the figure given is based on living space.  This is almost never done because few realtors, builders, or bankers make the distinction. 

            Only a construction person would bother to calculate the real square footage on the plans, rather than accept the architect’s living-space square footage. 

            And this would only be done for the purposes of uniformity and reality in comparing construction costs in the banking industry for evaluating new construction loan budgets, and for other interests related to construction costs such as cost estimating.

            An example would be helpful. 

            Using round numbers, assume a 3,000 square-foot size house in the year 2000 in East Manhattan Beach in Southern California on the inland side of Sepulveda Boulevard, with a lot price of $500,000 (knocking down the old existing house), a projected new house sales price of $1,100,000, and construction budget costs of $300,000.

            If we use these figures, the construction costs are $100 per square foot ($300,000/3,000 sf).  The builder, realtor, and anyone else involved in the marketing and sale of the new house will use this number to communicate the quality and amenity level of the construction.

            But what if, after calculating the square footage of the new house using the criteria of gross square footage plus the convention of 50% for garages and balconies (they have real costs) instead of living space, the actual square footage is 10% higher at 3,300 square feet.

            This new larger number in the denominator produces smaller numbers for each individual line-item and in the aggregate budget than when calculated using the architect’s square footage. 

            The construction costs per square foot are now $300,000/3,300 square feet yielding $97/square foot, not $100/square foot.

            From a sales and marketing standpoint, a $100 per square foot house sounds better than a $97 per square foot house.

            But in terms of the cost of the building permit fees, the smaller square footage figure is cheaper for the builder.

            But in evaluating a new construction loan budget, if the number for the line-item HVAC is understated by 10% at $18,000 when it should be $19,800 per the cost model, along with every other budget line-item like cabinets, countertops, finish plumbing, and hard surface flooring, for examples, the risk potential for the need for a loan modification is increased by 10%.

            The value of the product has been inflated artificially from $97 to $100, in an industry where these comparative numbers are important, relied upon, and evaluated by the consumer.