Reducing the Cost of Regulation

Government rules take time, money and skill to navigate. That's why you need a pro.

Did the budget for your new home come in higher than you expected? Part of the reason may be that the fixed costs of building anything have gone up.

By fixed costs we don't mean building materials. While this year's 170% lumber price increase has been painful for everyone, lumber is a variable that will eventually fall. What we're talking about here are fees and regulatory costs baked into the system.

Fees and regulations help explain why you see so many townhomes and small apartment buildings under construction. The ability to spread fixed costs over more than one unit is often the only way builders can provide housing for buyers with average incomes.

One fixed cost is utilities. There are minimum fees to run electric, water and sewage lines whether it's a small cottage or a five-bedroom home. There's also a minimum cost for central heating and air conditioning, regardless of size.

But the most significant fixed costs are regulatory. According to the National Association of Homebuilders, regulations account for roughly 25% of what you pay for the average new home—30% more than a decade ago. Regulations imposed on manufacturers make building products more expensive, while those aimed at builders and developers do the same for construction.

Please understand that we're not opposed to regulations. They're necessary to ensure safe jobsites and durable homes. But regulations can be a costly minefield, and it takes a knowledgeable builder to comply with those regulations while minimizing their effect on the budget.

Those effects vary by jurisdiction and project. For instance permit fees for a $1 million home can range from $12,000 to $40,000 depending on where in the U.S. you live. Some jurisdictions charge sales tax while others don't. Some projects require impact fees. Some require the builder to get a zoning variance, or to work with the planning or conservation commission during site development.

Building codes also vary in their financial consequences but a knowledgeable design and construction team that's familiar with the local code can often mitigate them. A case in point is the extra cost for thicker insulation and more efficient windows mandated by energy codes. By making sure the home's design and detailing are a perfect fit for the climate, the builder and architect can ensure that the monthly energy savings from those code requirements help offset the extra they add to the cost of a home.

The architect and builder can also control regulatory costs by getting things right the first time. That includes submitting code-compliant plans that won't need to be sent back for a re-do and working with subcontractors and inspectors to make sure that inspections don't delay the construction schedule.

Some regulatory costs are hidden. Recent OSHA rules include time-consuming recordkeeping demands. Some states have costly training, licensing and insurance requirements.

The time and expense of complying with hidden costs are part of the builder's overhead, but builders that manage them will have lower overhead. That's less cost passed on to the homeowner. It's one of the advantages of hiring an experienced pro to build your new home.