New Construction Cost Breakdown

Special Studies, November 1, 2011
By Heather Taylor
Economics & Housing Policy
 
Report available to the public as a courtesy of HousingEconomics.com
 

Introduction

Over the years, NAHB has periodically conducted “construction cost surveys” to collect information from builders on the various components that go into the price of a typical single-family home. NAHB’s most recent construction cost survey (conducted in 2011) shows that the cost of construction accounted for almost 60 percent of the final sales price of the average home, and the cost of the finished lot accounted for 22 percent. These shares are similar to the previous construction cost survey (conducted in 2009). However, when you compare these shares to construction cost surveys conducted prior to 2009, you will notice a large difference. In 2009, the survey methodology changed to provide a better, more representative sample of single-family construction across the country. Although the changes in survey methodology could account for differences in the sales price breakdown, the construction cost breakdown has remained relatively stable over the years. The following sections describe the methodology of the survey and discuss the results in more detail.

Methodology

NAHB’s 2011 construction cost survey was conducted by emailing a questionnaire to a representative sample of 2,185 home builders. The sample was stratified by size of the builder (based on number of starts) and region of the country (the sample being proportional to housing starts in each of the four principal Census regions).

Respondents were asked to provide information about the average home built by their firms during 2011. Usable responses were received from 44 builders. As is usually necessary when conducting a detailed business cost survey, extensive follow-up phone calls and emails were undertaken in order to verify various cost numbers and minimize item non-response. Table 1 shows the detailed results of the 2011 construction cost survey.

Table 1. Single Family Price and Cost Breakdowns

These results are national averages; the survey sample is not large enough for a geographic breakdown. Building practices, the cost of labor, the cost of land, and to some extent the cost of the materials can vary from place to place and depend on the nature of the particular home being built. Although the NAHB construction can provide a broad idea of construction costs for an average home, it is not a perfect tool for estimating costs for a particular house. Companies that provide more specific cost estimating, usually for a fee, include RSMeans (http://rsmeans.reedconstructiondata.com/ ) and Marshall & Swift (http://www.marshallswift.com/ ). The costs include all the costs paid by a builder that go into a particular item, including labor costs paid directly by the general contractor, the cost of hiring subcontractors, and the cost of materials however they are purchased.

Home Size and Lot

The average size of homes built across all 44 builders in the 2011 construction cost survey was a little over 2,300 square feet, which is 400 square feet less than the average size of the homes reported in the 2009 construction cost survey. The Census Bureau’s “Characteristics of New Single-Family Homes Completed” contains annual data on the floor area of a single-family home. According to Census Bureau’s annual report, the average floor area of single-family homes completed peaked at 2,521 square feet in 2007, and then declined regularly to 2,392 square feet in 2010.

The average lot size of homes built across all 44 builders in the 2011 construction cost survey was 20,614 square feet—just under half an acre (21,780 square feet). The average lot size has declined only slightly from 21,879 square feet reported in the 2009 cost of construction survey. The Census Bureau’s data on new residential construction shows that the average lot size for new homes sold was 17,590 square feet in 2010, up slightly from an average of 17,462 in 2009 and down from 18,433 in 2008.

Sales Price

The average price of the new single-family home in the 2011 construction cost survey was $310,619, down from $377,624 in 2009. The Census Bureau’s data on new residential construction shows that the average sales price of a single-family home sold was $272,900 in 2010, similar to the average sales price of $270,900 in 2009, and down from the average sales price of $292,600 in 2008.

Table 2 contains historical information on the for sale breakdown of the sales price of a single-family home. The total construction cost of a home accounts for 59.3 percent of the sales price in 2011, almost identical to the share of 58.9 percent in 2009. Finished lot costs account for 21.7 percent of the sales price, only slightly higher than the share of 20.3 percent in 2009.

Table 2. Single Family Homes Sales Price Breakdown History

Not surprisingly, the share of sales price going to a builder’s profit has dropped from 8.9 percent in 2009 to an all-time low of 6.8 percent in 2011 (see historical comparison in Graph 1). The remainder of the sales price is divided between overhead and general expenses (5.2 percent), sales commission (3.3 percent), financing cost (2.1 percent) and marketing cost (1.5 percent). Each of these shares is similar to the breakdown in 2009.

Graph 1. Profit History

NAHB’s Business Management Department sponsors the Builders’ Cost of Doing Business (CODB) survey every other year (on even years). The CODB is based on the income statements for a firm, rather than the price of an average house. Although the surveys are not perfectly comparable, the sales price breakdown in the Cost of Construction Survey is generally consistent with the results of the CODB. Table 3 contains the comparable parts of the Cost of Construction Survey and the Cost of Doing Business Survey. One noticeable difference is between the Cost of Construction’s profit (6.8 percent) and the sum of CODB owner’s compensation and net income before taxes (2.1 percent). Since 2008, the supply of new unsold homes on the market has been historically high. Firm-level costs associated with the unintended build up of an unsold inventory would tend to be captured in firm-level income data, but probably not in the price breakdown of an average home reported in the construction cost survey. The share of profit in the sales price of a home indicates that the home was sold, whereas the net income share in the CODB takes into account homes that have both been sold and those that haven’t.

Table 3. 2011 Construction Cost Survey vs. 2010 Cost of Doing Business Survey

Construction Cost

The average construction cost of a single-family home in 2011 is $184,125. This average is significantly lower than the 2009 average construction cost of $222,511. This is potentially the result of an average smaller finished area. While the average finished area of a single-family home dropped from 2,716 square feet in 2009 to 2,311 square feet in 2011, the average price per square foot remained relatively stable at $80 per sq ft in 2011 ($184,125 divided by 2,311 sq ft), compared to $82 per sq ft in 2009 ($222,511 divided by 2,716 sq ft). Lower cost finishes on the average single-family home in 2011 could also account for the lower average cost of construction.

Framing and trusses account for the largest share of construction costs (13.5 percent), followed by excavation, foundation and backfill (9.3 percent), plumbing (6.0 percent), and cabinets and countertops (5.6 percent). HVAC, siding, tiles and carpet, electrical wiring, and drywall each account for between 4 and 5 percent of total construction costs.

Table 4. Single Family Construction Cost Breakdown History

Table 4 shows the detailed construction cost breakdown for surveys conducted since 1998. Although the largest share of construction costs has always been framing and trusses, this share fell from 15.6 percent in 2009 to 13.5 percent in 2011. The framing and trusses total cost for an average single-family home in 2011 is $24,904, compared to $34,805 in 2009. However because the average size of a single-family home fell between 2009 and 2011, the average price per square foot remained relatively stable—$11 per square foot in 2011 ($24,904 average cost of framing and trusses divided by 2,311 square feet of average finished area), compared to $13 per sq ft in 2009 ($34,805 average cost of framing and trusses divided by 2,716 square feet of average finished area)—so the drop in average finished area of a single-family home between 2009 and 2011 may account for the smaller share of framing and trusses.

The share of HVAC as a percentage of total construction cost rose from 4.0 percent in the 2009 construction cost survey to 4.8 percent in the 2011 construction cost survey. The share of insulation as a percentage of total construction cost rose from 1.5 percent to 1.8 percent over this same time period. In an effort to make homes more energy efficient, the codes concerning new homes have become significantly stricter. The stricter codes could account for the increase in the share of both HVAC and insulation as a percentage of the total construction cost.

The increase in the price of copper and cost of adhering to stricter electrical codes could help explain the increase in the share of electrical wiring as a percentage of the total construction cost—from 3.7 percent in the 2009 construction cost survey to 4.4 percent in the 2011 construction cost survey. Historically, the share of electrical wiring has been fluctuating with the cost of copper and copper products.[1] Since a majority of electrical wiring is done with cooper wire, an increase in the share of electrical wiring could also be attributed to an increase in the cost of copper and copper products between 2009 and 2011. Also, as local jurisdictions adopt newer versions of building codes, the use of arc fault circuit interrupters may be on the rise, which could add several hundred dollars to the cost of electrical wiring in some homes.

 

Another component that has been increasing as a share of total construction costs is appliances. An NAHB study on the spending patterns of home buyers [2] found that new home buyers spend about twice as much on appliances than non-moving home owners. This indicates a gap between all the appliances that go into a new home and appliances customarily offered by builders. In October of 2011, builders responding to the survey that underpins the NAHB/Wells Fargo Housing Market Index (HMI) indicated a very slight increase in their tendency to provide appliances like wall or microwave ovens, refrigerators, washer/dryers, trash compactors, etc. Eighteen percent of builders said they were providing more of these appliances compared to two years ago; 12 percent said they were providing less.

Respondents indicated that the second largest share of construction cost goes to “other” costs. NAHB made a series of phone calls and emails to further investigate what these “other” costs are. Some of the most common responses are the following: construction clean-up, such as the cost of cleaning the house, the cost of the dumpster, and disposal of trash; mirrors, glass and shower doors; insurance; utility costs; fireplaces; and bathroom accessories.

The shares of various fees paid by builders to local governments—for permits, inspections, estimated impacts—remained relatively stable between 2009 and 2011 and together add to approximately 5 percent of construction costs. A recent article, based on HMI survey results, produced a slightly higher average of 5.8 percent for fees paid by the builder during the construction phase of a project.[3] The construction cost survey asked about 3 specific types of fees; the HMI survey question was very broad and sought to capture all categories of fees paid by builders. The HMI survey results also indicated that actual fees paid by builders do not have as big an impact on construction costs as changes in building codes and standards over the past 10 years; which, according to the survey, increase construction costs by an average of 8.3 percent.

 

[1] Copper and Copper Products Prices as reported by the U.S. Bureau of Labor Statistics
[2] “Spending Patterns of Home Buyers” by Natalia Siniavskaia, December, 2008: http://www.nahb.org/generic.aspx?sectionID=734&genericContentID=106491&channelID=311
[3] “How Government Regulation Affects the Price of a New Home” by Paul Emrath, July 2011: http://www.nahb.org/generic.aspx?sectionID=734&genericContentID=161065&channelID=311

For more information about this item, please contact Heather Taylor at 800-368-5242 x8503 or via email at htaylor@nahb.org.


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