There is one item in the plans for the new business that can completely blow out the budget. Getting this wrong has put many new businesses in the hole before the doors open.
From the title you know I am referring to the build-out line of the startup costs.
Not to boast, but I have never seen a business go through a build-out without going substantially over budget. It is common to see costs 100%, 200% and even 300% OVER the planned budget. 100% over would mean that double the planned amount was spent. Double.
I have prevented that disaster with my clients. This isn’t meant to be a boast. Rather, I want to let you know that it is not inevitable that you go over budget. In fact, it irritates me that business owners so easily accept blowing a planned budget as “the way it always goes with construction.”
That is nonsense. We hear the same arguments from government when the bridge or freeway cost comes in billions over budget. Wrong.
So how can you stay on budget when improving or starting your business?
Planning. Well of course. No one goes through the building process without planning. They just do not plan enough.
For example, let’s say that Joe wants to open a little cafe. He’s found a great location next to a big office building. There is no place to grab a sandwich in the area. This little shop will be a gold mine!
So Joe studies the location he has found. It was a barber shop. When the barber retired, he couldn’t sell the business so he closed the shop. It’s just big enough for a nice, clean, take-out sandwich shop.
Joe measures the place. Then he sketches out exactly the way he want s the shop to be. He gets prices for fixtures. Joe is smart. He gets dimensions for fixtures too!
Joe takes his rough drawing to an architect who uses Joe’s drawing to produce actual building plans. These plans are specific. The architect comes out and looks at Joe’s space and he checks all the measurements. He looks for potential structural issues. All the bases are covered.
Joe takes the plans to 5 different contractors and gets 5 different bids. The cheapest seems too cheap so Joe goes with the second cheapest.
Joe and the contractor execute a contract with a time table and specific costs.
All the bases are covered, right?
Why does Joe’s simple sandwich shop build-out go $200,000 over budget?!
If you are starting a new business or doing an overhaul of an existing business, you should be able to list at 20 ways that Joe’s budget can be blown by that much.
I can give 50.
Let’s consider only a couple of the biggest reasons build-out budgets go wild.
Joe’s architect understands structural code—at least enough to get by. He probably isn’t familiar with specific restaurant code. Does Joe’s new business fall under the category of “restaurant”? Maybe. Maybe not.
What about restrooms? The existing space, as a barbershop, had a single restroom. Joe decided to add a restroom. Smart. But Joe didn’t plan for a restroom that would meet the Americans with Disabilities Act. Both restrooms are too small to pass code. This changes everything. Not only must the restrooms be larger, they require different fixtures. Well, at $150-$250 per square foot, there went $20,000.
Joe plans a simple grill into the business. The city requires the venting to go straight up from the grill without making any bends. The problem is, Joe is on the bottom floor of a seven story building. The vent hast to bend a little to get outside and then up the side of the building. The city will only allow a slight bend in the venting if Joe installs a very large fan inside the vent. Joe naturally planned a fan but he undersized it.
But the vent has other problems. A straight up path from the grill will take the vent in front of a window on the fifth floor. Easy, we’ll just move the grill over.
Plan revisions, bid revision. Construction add-ons. These add several thousand dollars to the cost.
Whoooops. There’s a $10,000 permit fee? Yes, the city needed money. To buy an existing business, the license is only $500. To build-out a new business, the permit fee is $10,000. (Real example! Don’t think for a second that this can’t happen)
Construction begins and the restaurant supply house tells Joe that the grill unit he ordered has been replaced with a new model that is 6″ longer than the model he intended to buy. The good news is that it costs $500 less! But there isn’t room to install it under the current plans. The contractor can make some changes but this will add about $10,000 to the total cost.
Then the contractor comes to Joe with an idea. If we curve the counter, you’ll get 2 more serving stations and it only adds $5,000 to the cost. Joe agrees. Now the contractor has lots of suggestions. Joes agrees to most. These “suggestions” add up. They add up faster than Joe can add. Joe just wants to get this done. Screw the cost. Once he opens, he’ll make it all back.
Next Joe finds out that the floor material he planned is back-ordered.Because the flooring won’t be delivered this week, the contractor starts another project with a another client. He can’t get back to Joe’s project for a month. It’s not his fault that the flooring is delayed. He is not obligated (now) to stay on schedule.
Joe upgrades to a flooring he can have delivered tomorrow. Of course that adds a few thousand dollars to the cost. The contractor agrees to return to Joe’s project in a week.
I’m going to stop here because you get the idea. Even though Joe planned very well, he didn’t plan well enough.
I’ve only shown a fraction of the things that ALWAYS go wrong in a new business build-out. ALWAYS.
I’m serious when I say that you must have someone assist you when planning a new business or you will waste thousands and thousands of dollars.
Chris Reich, TeachU