Why Going for Cheap is a Bad Investment
We Share 3 Worst Case Scenarios
For most property investors starting out, to get their first shot at a development project they would’ve likely had to save, plan, sacrifice & wait years for the perfect opportunity (I know we did!).
Many people try to achieve their goals with limited resources and want to maximize the value of every dollar they invest. We completely understand this! We have learned a lot from our own projects and our clients' development journeys. Unfortunately, we have seen many people make the same mistake of solely focusing on finding the cheapest option for their designer, consultant, or build contract. While this may lead to short-term cost savings, it often ends up costing more in the long run. We want to share some of our experiences with you in hopes of helping you avoid these mistakes.
Case Study 1 - Going For The Cheapest Building Contract
Caylene found a development site in Melbourne’s South East that had potential, but the existing home was uninhabitable due to a recent fire. She needed to act quickly to get plans, permits, and start building, as the property had no rental potential. We helped her design three townhouses within her strict budget, using basic materials and low-level finishes while focusing on maximizing the layout and yield.
Everything was going according to plan until the tender stage. Caylene narrowed her list of builders down to three who met her budget and time requirements. However, one of them, Patrick, offered a price that was 20% lower than the next bidder. We noticed several red flags such as Patrick's lack of past client testimonials and a professional construction contract. Despite these concerns, Caylene signed up with Patrick, hoping to save some money on the build.
Unfortunately, the project soon encountered issues. A flimsy contract and constant cost variations caused tensions to flare and progress to slow. After a year of waiting and spending significant legal fees, Caylene was able to terminate the contract with Patrick. However, she still had to spend an additional six months finding another builder to fix the shoddy work and complete the project.
Caylene's project took twice as long to build, cost far more than it would have with the most expensive tender price she received, and dissolved any potential profit. This story highlights the importance of carefully selecting a builder, checking their credentials, quote and working history. A reliable builder with a good track record and thorough quote can save you time, money, and a lot of headaches in the long run.
Case Study 2 - Going For The Cheapest Consultant’s Quote
We had the pleasure of working with Alistair, whose project was to develop twin luxury townhouses in a prestigious Melbourne suburb. The complex design included four storeys, an underground garage, an entertainment rooftop and elevator access. We had reached the stage where we needed a Consultant for the intricate framing design, so we suggested our preferred Structural Engineer, Hendra, to our client. We had worked with Hendra for several years, and he had always impressed us with his skills and support.
Unfortunately, Alistair decided to go with a cheaper Consultant he had found online, named John. John had agreed to a competitive fee and was appointed quickly. However, it soon became apparent that he lacked the experience and expertise required for the project. His drawings were filled with mistakes, and he wasn't much help in resolving issues. To make matters worse, he was unresponsive, often dodging calls and emails.
Months passed, and the project was at a standstill, with Alistair's $2 million development site sitting idle. Interest repayments kept eating into the profit margin, and the build schedule was thrown out the window. Eventually, Alistair had to let go of John, scrap all his work and re-engage Hendra. By choosing a cheaper consultant, Alistair thought he was saving a few thousand dollars, but it ended up costing him an additional $40,000 in holding costs and discarded work.
In hindsight, it's clear that investing in the right consultant from the start is crucial for a project's success. Cutting corners on cost may seem like a good idea at first, but it can lead to significant losses in the long run.
Case Study 3 - Going For The Cheapest Designer’s Quote
Kevin met with us in our office to discuss his development project in Box Hill. We spoke about his goals, budget, requirements & before long Kevin presented us with another Designer’s fee proposal & asked if we could beat it. The fee was one-fifth of ours & the scope of services vague, only a few lines of description. I explained that we would not be able to price match without a comprehensive scope to compare. We offered one of our design packages to suit his project however, Kevin remained unconvinced & reiterated he simply wanted us to lower our fees. We both agreed we weren’t a good match & parted ways.
Fast forward 2 years, Kevin returns to our office looking to engage us for the next stage: construction documentation & interior design. Surprisingly, this time the meeting centred around the scope of services we could offer, with much less attention paid to fees. He admitted, in hindsight he’d regretted engaging the cheaper Designer as the services he’d signed up for didn’t meet his requirements, he’d expected prompt communications, all inclusive design revisions & a higher level of Designer input & involvement. Instead he received a simple set of drawings & lengthy wait times for email correspondence.
From a business perspective, the cheaper Designer services represented a ‘fast food’ type business model; cheap, fast & volume equals profit. For Kevin, he eventually realized that he needed a comprehensive design service & ongoing support to achieve the result he wanted. Ironically, in trying to save money with the Designer’s fees, it ended up costing him a lot more in additional services fees, holding costs (delays as the designer was working with a large volume of other projects) & a lesser design outcome (as good design takes time!).
When it comes to residential development projects, whether it be for profit or to live, it is imperative you do thorough research. There are areas where you can definitely cut back on costs, such as the purchase price of your site. When it comes to consultant and builder selection, if comparing quotes ensure you are comparing like for like and you have a very clear picture of what’s included and what’s left out.
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