When it comes to the construction industry, did you know that two subindustries exist?
On one end you have commercial construction.
The other is residential.
In this article, we will be looking at the differences of commercial vs residential construction.
If you’re deciding what industry you want to get into, I hope this article can help with that decision.
You should also know that most construction companies will only focus on residential or commercial work.
I personally worked for companies that perform only commercial projects.
I think one of the major differences that set commercial construction apart from residential comes down to money. Commercial jobs can be of much greater magnitude and dollar value.
A higher dollar value project means greater earning potential when it comes to profits.
We will look at the 9 different aspects of construction and compare the differences between commercial and residential jobs. This will include:
- Residential and Commercial Construction Defined: Key Differences
- The Difference in Cost and Selection of Material for Commercial vs Residential Projects
- Building Code and Permitting: The Difference Between Commercial and Residential Construction.
- What are The Differences in Financing Commercial or Residential Construction Projects?
- How Construction Costs Differ Between Commercial and Residential Construction
- What Type of Equipment is Used for Commercial vs Residential Construction?
- How Do Construction Schedules and Deadlines Differ in Commercial vs Residential?
- The Difference With Customers for Commercial vs Residential Construction
- What are the Differences When it Comes to Getting Paid in Residential vs Commercial Construction?
Residential and Commercial Construction Defined: Key Differences
When we look at the definition of commercial and residential construction, one thing stands out.
Residential construction is aimed toward people living in the building.
While commercial construction is for a place of business.
Residential Construction Defined
For residential construction, we’re talking about single-family homes. This extends to duplex, triplex, and quadplex housing as well.
Most states generally set the limit at 3 to 4 dwelling units before it becomes a commercial space.
We can also look at the definition of a residential project.
“Project involving the construction, alteration, or repair of single-family houses or apartment buildings of no more than four floors in height.”
Anything bigger than four floors or a quadplex is technically commercial construction building per this definition.
Commercial Construction Defined
Now, let’s look at the definition of commercial construction to see how it differs.
The Wisconsin Regulation of Public Utilities defines commercial construction as…
“Building and structure, or that part of any structure, that is not used as a home, residence or sleeping place by one more person(s) maintaining a common household to the exclusion of all others.”
The key section of this definition is, “that is not used as a home”. This should make it clear how to distinguish between residential and commercial construction jobs.
What are the Different Types of Commercial Construction?
The projects that fall under commercial construction are jobs such as:
- Assembly Plants
- Office Buildings
- Industrial Buildings
- Retail Spaces
- Schools & Universities
- Parking Lots
But, if you’re unsure if a job is classified as commercial or residential, refer back to the definitions.
The Cost Differences for Material in Commercial and Residential Projects
Looking at building materials, commercial construction projects will typically have greater material costs.
The design engineers create a contract specification which details what material and equipment is required for the project.
When you have a detailed spec, then the contractor will need to use higher quality material to meet the spec. The engineer will reject any material submitted that does not meet the spec.
To be clear, I am not saying that residential construction material is cheap. Rather, the quality will not be as great if there is no specification for the contractor to follow.
There are residential jobs that include specifications, it’s a matter of how detailed the specs are. Having a detailed specification prevents the contractor from installing the cheapest option.
Keep in mind, that the greater detailed your spec is, the more you will spend on the engineering time.
As a property owner, you may not have the capital to invest in all that design work. Especially since residential construction loans only cover the cost of construction.
More on construction loans and financing later in this article.
Construction Materials Used in Commercial vs Residential Work
When we look at residential construction, your average homeowner is typically looking for the most cost-effective route.
So, you probably won’t end up building a house completely out of steel-reinforced concrete.
That would cost you a fortune!
Instead, you’ll see residential homes built of wood frames. Also, electrical wiring is run in wire jacketing instead of in conduit.
But commercial jobs, especially high-rise buildings, will be built out of concrete with steel frames. There are also commercial jobs that require wiring to reside within conduit.
The additional material adds to the cost of the building quickly.
That’s why smaller buildings in commercial construction cost several million to complete.
Building Code and Permitting: The Difference of Commercial and Residential Construction
Before you begin work on a construction job, you need to obtain a building permit.
A permit is required for any project with a value greater than $2,000.
This applies to both commercial and residential construction.
So, you might be asking, what’s the difference then?
Well, for one, the number of inspections you will require is much greater than residential. The primary reason for this is the complexity and magnitude of commercial projects.
Also, know that the inspection requirements may vary a bit.
Montgomery also has a specific checklist for residential projects. The commercial checklist just includes some additional construction activities that don’t apply to residential jobs.
Side note, you should also know that not every county will have the same requirements for permitting and inspections.
For example, in Seattle they require each trade to pull a permit. While in Honolulu, Hawaii, only a single building permit is required for the entire project.
Also, the building permit is purchased by the general contractor or owner.
Lastly, the contractor who performed the work is required to call for inspections.
Building Code Requirement
Another thing you should know is the building codes application for commercial and residential construction.
Residential buildings typically abide by the International Residential Code or IRC.
While commercial construction utilizes the International Building Code or IBC.
I do want to point out something interesting about the code.
If we look at the introduction for both books, we find the type of construction that it covers.
In the IRC, it states:
“The IRC was created to serve as a complete, comprehensive code regulating the construction of single-family houses, two-family houses (duplexes), and buildings consisting of three or more townhouse units.”
Where the IBC states:
“The IBC applies to all occupancies, including one- and two-family dwellings and townhouses that are not within the scope of the IRC.”
Which means if you construct three townhouse units with commercial intent, it will still need to comply with the IRC. You can’t ignore the specific codes because it has “residential” in the name.
What are The Differences in Financing a Commercial or Residential Construction Project?
Funding sources for construction projects differ primarily in two ways.
- The type of loans available
- The amount provided for construction
Let’s look at the residential side first.
The following loans are what’s available to homeowners looking to build.
- Construction to Permanent: This loan becomes a mortgage at the end of the project. This allows the homeowner to pay it over a 15 to 30-year period.
- Construction Only: For this loan, the homeowner needs to pay it off once construction ends. If they can’t pay for the loan in full, they need to pull out a mortgage.
- Owner-Builder Construction Loan: Only take on this loan if you want to also act as the GC for your home construction project. This can be much harder to obtain since the bank will need to prove you’re capable to complete the work.
- Housing Tax Credits: This is a tax credit back to the developer which can be claimed over 10 years. With this loan, the developer will need to finance the project and then benefit from the tax credit over time.
Next, let’s talk about the down payment.
You need to know how much of your own money you will spend on the construction of your home initially.
For residential work know that banks will only loan out money to cover the cost of construction.
Additionally, the loan amount will be a percentage of the value of your home.
For example, let’s say you’re working on a renovation or expansion of your house. Your home get’s evaluated at $100,000.
The bank agrees to provide you with loan worth 95% of the value of your home. Now, a general contractor quotes your project at $100,000. The difference of $5,000 becomes your down payment.
When it comes to commercial construction loans, you have the following loan options.
- SBA CDC/504 Loan: This loan is a long-term, fixed-rate financing plan that covers construction which promotes business growth and job creation.
- SBA 7a Loan: Per the SBA, this loan provides financing to small businesses and is the best way when real estate is part of the purchase.
- Bank Loans: This is your standard bank loan from a bank. This is more difficult to qualify for because you and your contractor need to get approved. In addition to this, banks will typically cover roughly 70-90% of the loan. The remaining cost will be your down payment.
How Construction Costs Differ Between Commercial and Residential Construction
The cost of commercial construction is vastly different from residential.
This is for many reasons but the primary thing driving the cost up is overhead cost.
In commercial construction projects, you have a greater number of people assigned to the job. This is both on the office and field side.
Commercial construction will have your project engineers, project managers, admin, accounting clerk, procurement clerk, and more in the office.
Whereas residential construction companies may have just a few office staff.
Additionally, as mentioned in this article, the material that is specified in commercial construction is typically of higher quality. Not to mention the quantity between residential and commercial work greatly differs.
If we just look at the cost per square foot for residential vs commercial you can see the difference.
In New York, the cost per square foot to build a new home is $200. This is according to HomeAdvisor.
Meanwhile, the cost per square foot for commercial office buildings is $361. This is according to ProEst.
What Type of Equipment is Used for Commercial vs Residential Construction?
The equipment selected for residential vs commercial projects just comes down to the sizing.
This is due to the size of the equipment relative to the building or house.
Looking at residential construction, your typical houses won’t have very high ceilings for lift access. You may be able to get away with just using an A-frame ladder.
You can expect some of the following equipment to be found on a residential construction site.
- Man Lift
- Skid Steer Loader
- Backhoe Loader
- Mini Excavator
When we look at commercial buildings, there are typically several different large heavy equipment used.
Let’s consider a high-rise building, you can expect to find the following heavy machinery.
- Tower cranes
- Pile Driving Machine
- Concrete Pump Truck
- Roller Compactors
- Dump Truck
How Do Construction Schedules and Deadlines Differ in Commercial vs Residential?
Schedules and deadlines drive the project to be completed on time. Without a schedule, it’s hard for the builder and owner to gauge when a project will be completed.
Construction schedules also help determine the feasibility of the completion date set by the owner.
Consider a commercial project, there’s so much planning involved, and the project is conceptualized years before construction begins.
From development to engineering, obtaining permits, acquiring land, etc… These items can take years.
For example, in Honolulu, Hawaii, there’s a newly developing area called Kakaako.
Numerous high-rise buildings have been in the works for this area since 2012 from what I can recall.
Now, in 2023, construction is just beginning for some of the new buildings in this area. So, you can see how long the process may take just to begin construction.
Due to the size of the job, they expect at least 2 years for the construction process to be completed.
With residential work, the driving factor to the construction schedule is funding.
According to ProEst, residential projects tend to have a much shorter duration since they’re less complicated.
Once the funding is locked in, construction can begin.
Also, a homeowner may have a bit more flexibility on the project deadline. This doesn’t mean you should not let the contractor slide on the schedule.
The Difference in Customers for Commercial vs Residential Construction
Residential clients will typically involve working with a homeowner. You may even work with the occasional house flipper.
The average homeowner will be a bit more conscious about how much they’re spending on a project due to limited funds.
They may also be more flexible when it comes to the build. Rather than having strict specifications, they would be open to having work done as long as they get a quality product.
When it comes to commercial customers, this tends to be the complete opposite.
Some business owners are willing to work with the contractor, while others may not be so kind.
On some of my recent projects, I have been submitting RFIs to provide the customer with a better design. It went through the review process and they ended up rejecting the alternative due to additional costs.
All the time and effort put into suggesting the alternative was wasted.
Also, when it comes to commercial work, you rarely work directly with the owner.
The owner will hire a third-party company to represent them during the construction. This may be a construction manager and project manager to run the job.
Since the owner is not an expert when it comes to construction, they will rely on the construction management company.
Remember that the management company is acting as a consultant with the owner (their client) in mind. Meaning they supervise you and your team making sure you comply with the plans and specs.
Another type of customer you will interact with is a facility engineer. They are looking over the building to identify what needs to be replaced.
The facility engineer will also act as the general contractor for the company. Putting together a team of subcontractors to complete the work.
While this would be considered direct-to-owner work, this is not the owner of the building or company. Rather, it’s someone responsible for ensuring the building maintains its functionality.
What are the Differences When it Comes to Getting Paid in Residential vs Commercial Construction?
For residential jobs, you tend to get paid as the work is completed. This should be discussed with the homeowner on how the payment is disbursed.
If they have a construction loan they took out for the work, they will only be able to release the money in phases.
For example, the bank will only provide the homeowner with the funds once the foundation has been built. Then release another chunk of money after the framing has been installed.
You can expect to get paid once the work has been inspected and confirmed complete.
Commercial construction is a bit more complicated when it comes to payment.
General contractors will get paid every month as they complete the work. This is considered your progress billing.
Getting paid on time as a subcontractor is where things get complicated.
In a survey done by LevelSet, they found that subcontractors don’t get paid even after 40+ days of submitting an invoice.
This may be due to the payment application process and the review required at the general contractor level.
I have seen it take up to 90 days to get paid while working for a sub-tier subcontractor. This heavily affects the cash flow of a commercial contractor’s business, as they have to finance the work.
If you found this article interesting and would like to learn more, please consider looking at my pay application article. Here you will learn about the payment process in commercial construction.
Thank you for reading.
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