Townhouse construction costs in Melbourne

Hi Tony,

Not really giving you a direct answer to your query here, but I think the general consensus on all the property forums is that the big builders (those all-in-one packages) are screaming bad news and headaches.

You’d be best getting a project manager, or like you said handle the project yourself if you’ve got a bit of spare time.

If you want I can PM you the details of my architect who can give you a good idea of costs involved in the building process? Also I’ve done a bit of work for a developer in Melbourne CBD who does apartment and townhouse projects with a fantastic end product, so I can ask him who he uses also.

Cheers,
Ashley

It is my experience that an allowance of $1,500/m2 (inc. GST) is reasonable.
To budget anything less is likely to end in heartache.
And if you choose to save 20% margin by managing the project yourself, expect to earn every cent!

The profits are generally found in the acquisition of the right property, the design (don't waste m2) and the yield.
On the final point, if good design will yield 3 compact 3br town-houses, and a poor design yields 2 large 3br town-houses this has a "double double" effect: You will spend more to make less.

All that said, commendations for having a crack, and all the best with the project.

Yes, the budget of $1,500 needs to include all elements.

The reason it seems expensive is that people tend to compare "project" houses with "custom" houses.

If what you are proposing has not been built before – and this is generally the case with property development, whereby the dwellings must be designed to suit the land available – then it will be more expensive than something that has been done before.

If a builder builds the same dwelling 30 times, they know every bit that goes into that building. They know (exactly) the materials and labour costs and they have their supply rates at the lowest point. Hit the button and all the suppliers and contractors know what they need to do. Everyone involved accepts a lower margin in return for certainty and continuity.

Project homes can be built for $1,000/m2 or less on a tight margin, because the builder is more or less certain of that margin.

One-off buildings, on the other hand, are not so certain. The supply rates for labour and materials will be greater, and the builder will have a fatter margin to cover contingencies.

Are there ways you can save money?

1. Design carefully and consult with your builder before final documents are issued. They are generally happy to make some cost saving suggestions.

2. Don't waste m2. Every m2 built will incur a cost.

3. As the owner, supply all fittings and fixtures. The owner will have a greater motivation than the builder to scrap and bargain for savings on these items.

4. Some builders will happily build to "lock-up" stage only. On paper this sounds great, but there is still a lot to be done, and expertise required to get it done.

5. Do your research and specify according to the market in which you are developing. Timber floors and stone bench tops are lovely, but your prospective tenant may not be willing to pay for them.

My father is a painter and obviously we can have the painting done ourselves, and the other areas such as landscape and plumbing and electrical we could organise for subcontractor to do directly by contracting it these things. Just wondering approximaltly how much discount can one obtain by having these things done one-self.
Also if you engage a builder to do these the entire project, they essentially act as the property development manager? There would be no requirement to obtain a development manager to oversee things. What do you guys think about that. thanks

If you dont have a builders licence you will have to go owner builder.
You cant do multi unit work as an owner builder anymore.

I thought a builders licence was only required for the heavy work, whereas things such as painting, landscaping, tiling etc was not required by a licenced builder specifically, please advise if my assumption was incorrect.

thanks,

To answer your question:

"One more question for Christian B
Given that these types of constructions are one-offs, you mentioned that a builder may typically allow a little more fat for contingency. So would you expect them to add a margin more like 25-30% rather than 20%?"

Across the industry the historical average margin is I believe around 16%. This has long been the accepted benchmark for a healthy building company. A project builder, building a product they know and understand may accept 10% or less for a reliable margin.

A builder constructing a one-off (known in the industry as custom build) will assume an increased supply rate and will also generally look for a higher margin – say 20%. These two elements, combined, will result in a cost of at least 20% greater than a similar sized and finished "off the shelf" project house.

Christian, your earlier post was spot on, it aligns exactly with my post here https://www.propertyinvesting.com/forums/property-investing/value-adding/4343689 but explains it better.

BTW I am currently doing 3 bed, 3 bath, single garage townhouses which are 125 sqm, in a location where the builld costs $1,800-$2,000 per sqm turnkey. 200 sqm may not be the optimal size, even if you can fit them on the block. For me it makes the difference of a 40% profit on costs at 125 sqm, whereas probably no profit at 200 sqm.

Note also that profit isn’t the only factor. For me with a limited capital base, I reviewed and discounted some larger build configurations that may have had a higher profit margin, but had a prohibitive cost base.

For argument’s sake let’s say your 200 sqm townhouse costs $300,000 and at 125 sqm it would cost $187,500. You may get an extra $120k in sales value for the larger build, so in theory you get an extra $7,500 profit per townhouse, but you have a much higher build cost and it will be much harder to fund.

I am trying to work on the theory that for every extra $0.65 I spend, I need to be getting back $1 more in sales value. This is in line with the lending requirements of the banks which will fund a maximum of 65% of the final realiseable value (net of gst). By following this simple formula, I ensure that I can still fund the build with a limited capital base. If alternatively you are funding based on 20% of the costs, it becomes even more important to minimise them where ever possible.

Cheers,
Matt

Jazz, generally speaking the margin is what's left after all costs and overheads are accounted for. Different people look at it in different ways, but to me this is the simple answer.

Matt, I commend you for building 3br dwellings of 125m2 – that's a perfect size in my opinion.

Interestingly, it's much easier to design 3br dwellings with 200m2 to play with. Designing a 3br with an "area budget" of say 120m2 is more difficult, but the effects on project profitability – as you rightly point out – are profound.

It is also, in my opinion, better to start with a constraint like an area budget and work from that starting point rather than trying to cut things back later on. I would prefer our clients sacrifice a little space than sacrifice the quality of the space.

Unless otherwise instructed, our office assumes the following "area budgets" for our projects:
2br =  90m2, 3br  = 120m2, 4br = 150m2.

As for your question about PC or PS items within contract, if the owner is to supply, that's exactly what they must do. In practical terms it's probably more about reasoned and informal negotiation.