Cost data for Remodeling’s annual Cost vs. Value report is gathered by Bill O’Donnell, whose company, RemodelMAX, uses the Clear Estimates software program. Remodeling recently spoke with O’Donnell to learn how he goes about compiling costs of goods and services around the country.

How do you keep track of material costs?
I get updated on a lot of different products every quarter, such as lumber, plywood, roofing, insulation—what I would call commodity items. Almost all the information comes from the Internet. I adjust those prices with formulas I have to better replicate prices to what you’d find at a full-service lumberyard.

In some cases, I can extrapolate. If you’re talking about plywood, for example, I’m only going to price one size and one thickness of plywood because 99.99% of the time the prices change, percentage–wise, in plywood across the board. If something goes up 3%, the other sizes will go up 3% as well.

How do you come up with the list of materials a builder will need for a particular type of project?
You just build the project in your head. If it’s an addition, you’re going to have excavation and concrete work and formwork and wall framing and floor framing. My system is set up so it goes in chronological order in the way the project is built.

Bill O'Donnell, president, RemodelMax
Bill O'Donnell, president, RemodelMax

There’s quite a bit of variation in the cost of different projects around the country; why is that?
People make different amounts of money in different areas. In some areas the cost of living is lower and the amount of money people make in salaries is lower, so what people pay is lower. When you go to a big city, people are going to expect more; they’re going to have bigger projects. I used to live in Maryland. Just 60 miles outside of Washington, D.C., salaries for contractors were 20% to 25% lower.

Why do some materials, like shingles, vary in cost in different parts of the country?
There’s no particular reason except that some areas can bear the brunt of higher prices because people make more money and remodeling jobs cost more. You see this with plywood. You will find during hurricane season when they’re getting ready to sell a lot of plywood in Florida, plywood prices go up everywhere—except in Florida. Why? Because people in Florida can’t afford expensive plywood. So manufacturers just raise prices everywhere else. When we had big storms back in the ’90s, Florida was actually one of the cheapest places to get plywood. That’s typical on a lot of commodity items.

What kinds of trends have you spotted over the years?
What’s happened in this long, drawn-out recession/depression we’ve had is that many contractors have gone out of business, and many of them have diversified into other things. So you’ll see remodeling contractors now, instead of doing additions and bathrooms and kitchens, doing roofing, maintenance work, plumbing, and painting. The workforce has moved to a different type of work.

People are not spending their discretionary funds anymore because they got wiped out. If your roof leaks, you’ve got to replace it, whether you have the money or not, whether you lost money in your IRA or not. But building that extra addition, they don’t have to [do that]. What you’re starting to see is people improving their homes and living in place. Because housing is no longer a good investment [compared with prices a decade ago], they’re going to improve or enlarge their homes and make it better for living in place. I still think the industry is going to be fairly slow for another couple of years.

Where do the labor costs come from?
We have this giant dartboard and it’s got labor figures all around it and we throw darts at it. No, just kidding. Obviously there are a number of companies that do pricing for construction and remodeling and all of us keep up on each other’s prices, so we wind up trending everything and combining the numbers. There also are government figures that are based on questionnaires submitted by construction companies. You kind of smoosh all of that together. I also include the median cost of housing and the median family income in each city. That helps make labor rates more accurate.

Has the Hispanic workforce had an impact on labor costs?
I can see a big impact in residential tract building or commercial building. But when you are doing remodeling, the crews are highly skilled, so whether they’re Hispanic or whether they’re not, I think they’re all making the same amount of money. I don’t think you’re going to see a big drop in labor costs in remodeling because of immigrants. To me, it’s apples and oranges—new construction and remodeling are pretty different animals.

How should the Cost vs. Value data be used?
Contractors are very happy with the report because it helps justify the costs to their customers. They can go in and say, “Here’s an example of an addition that’s being built and you can see how much it costs.” They need an outside source to justify that, to say, “Wow, $120,000 is a reasonable price for this.” And Mrs. Jones thinks, a national company determined these prices so her remodeler’s estimate must be correct.

Are these numbers useful for homeowners? 
What I like about it for homeowners is once you put the value to it, it really helps the homeowner decide whether they want to make an investment in the improvement, thinking down the road five, six years, when they sell it, what they’re going to recoup.

The return on some projects is so low you’d wonder why homeowners would consider them at all. 
Well, the way you look at it is replacement items always accrue more value because you have to do it and they’re low cost. Putting in new windows helps the sales cost of the building, and it retains its resale value because it’s something the potential buyer doesn’t have to do after the sale.

When you put in a quarter-million dollar addition to your own liking and your own taste, you’re only going to recoup so much of that because most people don’t think that it should cost that much—and if they were going to spend that much money, they would want their own design. That’s why the bigger, more high-end improvements do not recoup as much money.

What do you think are some of the cost issues that remodeling contractors struggle with the most?
One of the biggest misconceptions or confusing points is what’s called markup and margin. When you do a job or you sell a product, you have what it costs to do it. So, for a remodeler that would be the amount you spend out of pocket, including what you pay for workers’ comp and FICA and Social Security, and your materials cost. So you need to mark that up in order to pay your telephone bill, your office space, your office staff.

What’s recommended throughout the industry is a 67% markup on materials and labor, which gives you a 40% gross profit, which should yield you an 8% to 10% net profit. But here is the biggest problem—it’s easy to know what you spent on materials after the job. The question is, do you really know what you’re paying out for labor? That’s the biggest problem remodelers have: not knowing what it cost them per hour just to have a crew on site.

Most remodeling contractors are small—they wear many hats, they sometimes fly by the seat of their pants, and one thing they often miss is actually keeping track of costs. When we come up with a labor rate, we get what a guy actually gets in his paycheck, [but there’s also] 15% for taxes and FICA; workers’ comp, which probably averages 20% or more; and then we throw in 8% for fringes which might be paid for by the owner, such as paid holiday and vacation or contribution to medical, that sort of thing.

In certain industries in construction, the typical is a 10 and 10. So you mark up 10% overhead and 10% profit, which isn’t nearly enough. That’s one of the tough things in the business: getting people to understand what their actual labor costs are and how much they have to mark them up.

Where do you see labor costs going up the most?
In the large cities, and that’s just because the cost of living rises higher than in rural areas.