Creating a realistic home construction budget: 7 things to know
After 40 years in residential construction, I say this with absolute certainty: setting and managing a realistic home construction budget is the single most important factor in the success of your project. It determines what you can build and who you can hire. Most importantly, it determines whether you end up with a solid investment or a stressful money pit.
That might sound obvious. But you'd be surprised how many homeowners dive into construction without a clear sense of what things cost or how they’ll pay for them. They fall in love with an idea, hire construction pros, and even begin construction before they've even figured out what they can afford and how they'll make it happen.
Before you do any of that, read this first. In this guide we’ll walk through the key things to know about setting and managing a construction budget, whether you're building new or renovating.
These are the budget lessons I've learned from working on over 2,000 custom homes in one of North America’s priciest markets. But they’re just as important if you’re working on a smaller project or in another part of the country. Follow them, and you’ll be more prepared than 90% of the homeowners I see on a daily basis. Talk about starting off on the right foot!
1. Start with what you can afford. Then, work backwards.
It may seem like I’m stating the obvious here, but you’d be amazed how many construction projects I’ve worked on where the homeowner didn’t have a clear sense of their budget. In fact, a 2021 study by Houzz stated that 27% of homeowners went into a renovation without a budget. That is a crazy statistic — and a one-way ticket to stress and overspending.
For a lucky few, money is no object when it comes to their house. The rest of us have limits — and we need a plan to stay inside those limits. It’s the difference between a worthwhile investment instead of a nightmare money pit.
So — before you go any further, make sure you have a clear number defined for this project. What can you realistically afford to spend?
Talk to whoever you need to in order to get buy-in: your partner, your financial advisor or mortgage broker, or your accountant, or your insurance agent (to understand how the work will impact your premiums). If you plan to sell in the next few years, a trusted real estate agent who knows your neighbourhood well is also a good person to contact.
Got that number written down?
Good.
Now it’s time to start thinking about how you’ll spend it. That’s what the rest of this article is about.
2. Build in a healthy contingency
Once you have defined your “what we can afford” number, you need to set aside a contingency fund. This is an envelope of cash you set aside to cover cost overruns or changes in scope, materials, or finish. It should live outside of your actual construction budget.
Your contingency is a big part of ensuring you have an emergency fund to draw on when things change or unexpected costs come up — and they will come up. It gives you extra runway and flexibility that often makes all the difference in getting to the end of your project with your budget intact. If you don't have a contingency, you may have to make significant sacrifices or even stop the project midstream.
How much to set aside as your contingency depends on a number of things, including:
The size and complexity of your project. Bigger projects and unique or custom features mean more room for changes in labour, materials, and timelines.
Your home's age and condition (if you’re renovating). Older homes tend to hide more expensive surprises behind the walls.
How detailed your planning is. The more specifics you lock down in advance — from detailed blueprints to selecting your finishes and appliances — the fewer budget surprises you'll face.
Market conditions and material choices. Supply chain issues and material costs vary by region and can change quickly, especially with high-end finishes.
That said, as a very rough rule of thumb, I suggest setting a contingency in the range of 15-30% of your total budget — 15% for new builds and 30% for renos, because with renos there’s a greater chance of unknowns. The smaller your project, or the newer your home, the more you can slide to the lower end of that scale.
More than any one number, though, my advice is to set aside as much of a buffer as you possibly can. It will make decision-making and managing stress much easier once you’re in the thick of your project.
Once you’ve set aside your contingency fund, what’s left forms your construction budget. Most homeowners start budgeting by figuring out their cost per square foot — so let’s look at that next.
3. What to know about cost per square foot
“Cost per square foot” is the total cost of your project divided by its total square footage. For example, if your budget for a 2,000-square-foot home is $600,000, your cost per square foot would be $300. (Remember that this is your construction budget — your contingency fund sits outside of this number.)
Deciding on the cost per square foot you’d like to target can be a useful starting point as you start to build out your budget. But keep in mind that this number — and what makes sense for your budget — will depend on where you live, the costs of materials and labour in your area, and how much you choose to spend on materials and finishes. It can also leave out crucial costs, including:
Site preparation
Temporary power and facilities
Permits and engineering
Security and site monitoring
Utility connections and upgrades
Landscaping
Project management and oversight
To get a more accurate understanding of what your project will really cost, try to make a list of every possible thing you will need to complete the project. The more you can nail down the specifics of your design and the full scope of what’s needed to make it happen, the closer you’ll get to a realistic budget that reflects your actual costs.
And before you sign on the dotted line with any builder, make sure you have a detailed breakdown of every category involved in the construction process — and a number to go with it.
4. The expensive stuff is usually hidden
It’s tempting to think about your construction budget in terms of what you expect to see every day — the tiles, paint swatches, and cabinet doors.
But the most important part is actually your home’s core systems and infrastructure — things like windows, electrical, HVAC (heating, ventilation, and air conditioning), and plumbing. Not only are they the backbone of your home, they’re the most expensive to fix or replace later.
This matters because every decision in construction has a domino effect. Making one change kicks off a cascade of related work — and each domino comes with its own price tag. Often, the stuff we can’t see or don’t anticipate is where costs really start to pile up.
I’ll give you a simple renovation example. Say you want to replace your carpet with hardwood flooring. Sounds straightforward, right? But think about what that floor touches:
Your baseboards and door trim (which will need replacing if your new flooring is a different height)
Your walls (which might need patching and painting if baseboards are replaced)
Adjacent rooms (where you'll need to decide how to handle transitions)
Now multiply that kind of thinking across bigger changes like moving walls or upgrading kitchens, where you're also dealing with electrical, plumbing, and HVAC systems. You can see how costs can multiply quickly.
So how do you apply this to your budget? Here’s my advice:
Focus your spending on good bones first. You can update cabinet hardware or paint colours later, but replacing your HVAC system is a much bigger undertaking.
Think through the what-ifs. Before you commit to any change, make a detailed list of everything that change touches or affects. Try to map out the domino effect and plan for it in your budget.
5. Be clear on who you need to hire — and when
Who you hire, and the order in which you hire them, is one of the most important budgeting decisions you can make. It’s so important that we wrote a massive article on everything you need to know about hiring contractors, architects, designers, and the trades.
If you’re planning to hire, please read that article in full. But for now, remember this: Good construction pros are worth their weight in gold, but assembling the right team is strategic and takes balance.
In most cases, your contractor should be your first and most important hire. They’re best placed to:
Give you realistic cost estimates based on current market conditions
Recommend other qualified professionals who will work well as a team
Help you understand what's actually buildable within your budget
If you start with an architect or interior designer, you risk falling in love with plans or designs that you simply can't afford to build. I've seen too many beautiful drawings and design boards that had to be completely reworked (or abandoned) once the real construction costs were priced out.
Ask your contractor for advice on putting your team together. They'll help you bring in the right expertise at the right time — and help you preserve your budget for the actual construction work.
6. Magazines and curated feeds are not real life
I hate to be the bearer of bad news, but those gorgeous homes you see in design magazines, on HGTV, or scrolling Instagram and TikTok feed are depressingly unhelpful when it comes to figuring out a realistic construction budget for the average North American homeowner.
Those projects — especially in magazines and home construction shows — typically represent the top 1% of construction budgets, with massive design price tags and wildly expensive customizations. When they do include prices, they often skip labour, which is usually the costliest part of a construction project.
Here's the thing: you don't live in a magazine or an HGTV reveal episode. You live in a real house with real people, real pets, real life… and a real bank account. Glossy spreads, shows, and social media feeds may be inspiring, but they’re not a realistic guide for what things actually cost.
I’m not saying don’t rely on them — they can be a great way to spark ideas and identify design choices and styles you love. But when it comes to budgeting, do your own research or work with your contractor to understand what things actually cost in your local market. They can help you find ways to achieve the style you love while staying within your budget.
7. Keeping your budget on track
Coming up with a realistic budget you’re comfortable with can take a lot of work and research. It also requires flexibility! Major home construction projects take a lot of time and typically involve multiple twists and turns along the way.
This isn’t a “set it and forget it” process, and it’s not a “hand this off to my contractor” process either. The best way to make sure things stay on track is to review and adjust regularly. This is especially true for renovations, where unexpected surprises can force quick decisions about scope and spending.
There are a few key points during the process where it’s especially important to update your budget:
When hiring your contractor or any other major hires
When creating the high-level design plan (what’s behind the walls and in the ground)
When finalizing your design plan and selecting materials and finishes
After your structural inspection (if applicable)
After your HVAC, plumbing, and/or electrical have been installed and inspected (if applicable)
After your framing inspection* (if applicable) and drywall is up. At this stage, you’re moving on to finishing. If you need to adjust your budget or cut back on spending, this is a good time to do it.
To see how this fits into the construction process as a whole, take a look at our complete guide for homeowners!
* Framing inspection is an industry term that is a little misleading. It’s not an inspection of your framing; it’s an inspection of every system in your house (heating, HVAC, plumbing, and framing) prior to covering it all up with drywall.
Key takeaways
Start with what you can actually afford. Not what you wish you could spend, not what you saw in on social media — what you can realistically afford right now.
Build in a healthy contingency (15% for new builds, 30% for renos) and keep it separate from your main construction budget. You'll probably need it, and having that buffer will make decision-making much less stressful when the time comes.
Focus on good bones first. Invest in your home's core systems and infrastructure before spending on visible finishes — it's much more expensive to fix these things later.
Be strategic about who you hire and when. Start with your contractor, and let them help you build the right team at the right time.
You’re responsible for keeping your budget updated as the project evolves. Regular reviews and adjustments are essential, especially at key milestones in the construction process.
I know all of this can sound like a lot, especially if you're just starting to plan your project. But I promise you: the time you spend working through these budget fundamentals now will pay off many times over once construction begins. Get these pieces in place first, and you'll be well on your way to the home you’ve dreamed of and an intact bank account.
And if you need more help planning your project — check out our Home Building Checklist below! You’ll see where budgeting fits into the larger construction process, and get my advice on how to navigate your project from start to finish.
