Just like machines cannot run without fuel, construction projects cannot kickstart without a construction budget. Cost estimation and budgeting are effective tools that lead to a project’s success. Nobody can estimate a 100% accurate construction budget. In fact, the most experienced construction contractors face budgeting challenges like cost overruns.
A study by global consulting firm McKinsey & Company reveals that large projects across various industries typically take 20% longer to finish than scheduled and are up to 80% over budget.
For a smooth and timely completion of the commercial construction project, contractors need to plan and follow a realistic construction budget. So how do you estimate different costs for a construction budget, manage them, and ensure that you are not overspending? Let’s find out.
What is a Construction Budget?
A construction budget is a financial plan for the acquisition, installation, testing, construction, and development of any real estate property.
It is the breakdown of construction costs from initiation to closure, including additional expenses accrued during the building process. A general contractor develops a construction budget for clients with the help of professional estimators and quotes from suppliers and subcontractors.
Different factors impact construction cost per square foot like materials, labor and official documentation, profits, and overheads. General contractors have to present a detailed construction budget plan to stakeholders and investors prior to approving the project. Clearly laying out a realistic budget before clients helps to provide value and predict the return on investment.
The starting point for developing a construction budget is project plans and blueprints when all the components must be considered and calculated. A well-managed construction budget eliminates the possibility of unexpected costs, leading to cost savings and stress-free clients.
Sample of a Commercial Construction Budget
Why is Construction Budgeting Necessary?
Construction budgeting is an instrumental step in determining the outcome of a building project. Similar to a compass, the budget shows your work progress, guides you in planning your next step, and increases the profitability of the project. Whether it’s new construction, renovation, or expansion of an existing building, undertaking construction budgeting is indispensable.
Reason 1 – Saves Time and Reaps Profit
It’s most likely that the stakeholders of your project have invested in its construction and would want to make profits. Starting a project without budgeting means exhausting way too much money. Hence, establishing a construction budget helps contractors accurately determine the funds necessary to accomplish each task.
When properly planning for the project, you can take calculated steps to ensure everything stays within the budget. A comparison of actual costs with projected costs is important to measure the efficiency of the project. By developing a carefully constructed budget, you can save time and money throughout the project.
Reason 2 – Keeps Project on Track
Numerous projects have been left incomplete or delayed because of expenses that were unaccounted for. By adhering to an intricately detailed construction budget for a construction project, you will be able to account for these expenses during execution and prevent the building plan from getting off track. When you break down the project into manageable tasks, it’s easier to track their progress and ensure they are finished on schedule.
Reason 3 – Provides Cost Estimation
For successful construction budgeting, one needs to understand the costs associated with each aspect of the building project. This will be critical when procuring funds and allocating them for various tasks, making sure they are completed according to clients’ expectations.
Building materials and equipment, labor, location, project timeline, and building codes are some of the construction budgeting factors that are counted in cost estimations. All this information helps to determine whether the project can be successfully executed within the monetary constraints. If not, adjustments are made to the construction budget or additional funding is acquired.
Reason 4 – Creates Team Guidelines
Construction budgeting creates realistic guidelines for the project team to follow and ensure budget efficiency. Your team should update you with detailed cost reports mentioning equipment usage, materials use, and expended person-hours. Another classic way of making an organization efficient is to set SMART goals and track key performance indicators (KPIs).
Construction budgeting improves project management by pushing you to set achievable goals and accomplish them within restricted funds. It also keeps your employees accountable for reaching set benchmarks. As a result, profits increase when the same outcomes are achieved with lowered estimated costs.
Reason 5 – Identifies Priorities
While developing a construction budget, you will be able to prioritize essential components of the project. For instance, if the funds are limited, a contractor can focus on essential tasks and reduce the direct costs of excludable jobs. Furthermore, you can find alternatives that will not affect the costs but yield the same value. If a client wants hardwood flooring, but the price for a square foot is $28, use a cost-effective alternative like bamboo that costs $4 per square foot.
Essentials of Construction Budget
The best practice is to divide a construction budget into four essentials – hard costs, soft costs, overhead profits, and contingencies.
1. Hard Costs (Direct Costs)
As the name suggests, hard costs or direct costs comprise expenses directly connected to the actual building work and development. Hard costs make up 70-80% of the total construction budget. Sometimes referred to as “brick-and-mortar” costs, hard costs represent the cost of tangible aspects such as –
- Equipment Costs
- Material Costs
- Labor Costs
- Utility Costs
- HVAC Systems
- Landscaping Expenses
- Cement Costs
Experienced building contractors using their established relationships with suppliers and subcontractors, can decrease materials and labor rates or employ their own laborers. These savings can be utilized for a better finish, increasing the value of the client’s property. Labor costs are fixed but depend on the time each worker is required. A clearly defined construction budget removes the risk of delays and saves money.
2. Soft Costs (Indirect Costs)
Even before the construction work begins, your project will incur certain costs, called pre-construction costs or soft costs. Estimating soft costs is much harder as they are intangible and often not strictly related to one specific project.
For example, insurance or legal fees may apply to the whole company, so in a construction budget, you should include only part of these soft costs. Typically, 20-30% of the construction budget is allocated for soft costs.
Construction soft costs can be –
- Design/Architecture Consultants
- Land Surveys
- Insurance
- Legal Fees
- Temporary Facilities
- Accounting Fees and Taxes
- Construction Organization Costs
- Project Operation Costs
- Repair and Maintenance
- Marketing Costs
3. Profit Overhead
Overhead in construction includes all the costs necessary for a company to operate its business. For example, monthly fixed costs like rent, utility expenses, insurance, and credit obligations. Overhead also encompasses indirect costs like employee salaries, office supplies, and vehicle expenses.
Overhead = (Fixed Monthly Costs) + (Indirect Costs)
A construction budget’s profit is the difference between the money you received and the actual costs you spent on the project. An ideal profit margin for commercial construction companies ranges between 8% to 10%. The amount of profit can depend on the work scope, potential costs, contractual agreements, or project budget management techniques.
For example, if a commercial construction project is worth $100,000, and it costs $60,000 for labor and materials plus $ 10,000 for overhead, then the contractor’s profit will be $30,000.
Profit = (Project Cost) – (Direct Costs + Overhead)
4. Contingency Funds
A construction project contingency is a specific amount of money, a percentage of the total project cost designated for funding unexpected or additional expenses. Construction contingencies can happen due to various reasons:
- Labor or material shortages
- Weather delays
- Subcontractor or personnel issues
- Design errors or change orders
- On-site accidents or damages
- Inaccurate price estimates
- Bankruptcies
In most cases, 5% to 10% of the total construction budget is set aside as contingency funds.
Costs Included in Construction Budget
Construction budgets are usually formed during the bidding stage when general contractors have to examine bid documents and project plans to estimate the total costs. Depending on your company’s role in a building project, you need to include different types of expenses, as elaborated below.
Property Acquisition Costs
These costs refer to land or property acquisition expenses that depend on the location and scope of the construction project. In addition to lot/land price, other property-related expenses are real estate purchase fees, permit fees, taxes, and financing.
Professional Fees & Services
Construction projects need an extensive range of professional services and expert consultants which fall under soft costs. These can be building and occupying permits, testing and inspection fees, design services, HVAC engineers, accounting fees, and others. As a general contractor, dedicate extra time estimating these costs, as they might be the bulk of your construction budget.
Project Management Services
Project management services are provided by highly skilled staff who require their own equipment and supplies to work. The project management service costs can include expenses related to safety supplies, productivity software, digital tools, office utilities, phone bills, or even an internet connection. Even as capital investments, these soft costs of construction budgeting are still critical to getting jobs done.
Labor Costs
Realistic construction budgeting involves estimating labor costs. This is the cost of your tradespeople, subcontractors, equipment operators, and other human resources. It consists not only of hourly wages but also of workers’ compensation, vacation, payroll expenses, and sick time. Improving labor productivity is a great way to extract profitability from your expenditures.
Material Expenses
Unlike others, materials expenses are negotiable in a construction budget. General contractors have strong relationships with suppliers, so they can negotiate material prices based on quantity, especially when they are buying multiple materials from the same vendor.
Material expenses are generally broken down into two categories: site preparation and building structure. The former includes paving materials, pipes and drains, and landscaping materials whereas the latter may have framing materials, roofing, insulation, flooring, drywall, etc.
Equipment and Tools Costs
Contractors should refer to their material and labor lists to finalize the selection of equipment and tools, and rent required quantities from their trusted suppliers. Take into account expenses such as equipment rental, delivery, operating, fuel and maintenance costs while budgeting for a construction project.
Insurance and Bonds
Every building project is legally subjected to insurance coverage and the costs related to liability protection. Depending on the project’s size and complexity, you may be asked to pay a deposit or bid bond. This will guarantee your commitment and ensure all subcontractors, tradespeople, and suppliers are paid. Don’t hesitate to consult a professional financial officer about current terms and conditions.
Utilities and Taxes
This includes electrical, water, sewer, and gas installations and their associated permit and hookup fees incurred during construction. Keep yourself informed of all the government codes and restrictions of your area. Make sure your construction plans are compliant with ADA Standards for Accessible Design.
Moreover, depending on the type and scope of your project, it’s possible that it may also be subjected to local and state taxes. Work with a certified accountant experienced in construction finance to confirm you are properly accounting for all taxes.
Overheads & Profits
Overheads are operating expenses for running your business like office rent or transportation costs. Their nature determines whether they are considered hard costs or soft costs. Profit is the amount left over after paying all expenses.
Contingency Budget
A contingency budget acts as backup insurance for all unforeseen spending. This fund covers last-minute upgrades, machinery damages, accidents, and any other surprise costs. In addition to code restrictions, spare a portion of the construction budget for possible design omissions, team delays, on-site problems, and any changes requested by owners.
The contingency fund can be 5-10% of your total construction budget, depending on the project type. In some cases, the contingency fund may be as high as 20% of the total budget.
How to Create and Manage a Construction Budget Plan?
Creating a competitive construction budget is a tremendous undertaking, even for experienced contractors and program managers. However, that shouldn’t hinder you from making a watertight budget. The construction budgeting process can be divided into four key phases.
Phase 1 – Research and Analysis
The central objective of this first phase of research and analysis is to forecast all costs associated with your project. Start by assembling a project team depending on the size and structure of your construction company. Identify the project goals, requirements, and assess site conditions or any existing documentation. This will help the team evaluate the feasibility of the project and how they can handle overruns without going bankrupt.
Phase 2 – Design and Development
In this phase of construction budgeting, you will meet architects and design consultants to seek their expertise. Pitch your creative ideas to them and request to produce drawings and models for obtaining final approvals from stakeholders. Once the sign-off is done, create a list of material requirements and develop a budget around them. Most clients have no idea about the building materials and their related costs. With such a prepared construction budget at their disposal, clients will be able to start requesting bids from potential contractors.
Phase 3 – Pre-Construction and Documentation
The pre-construction planning aims to arrive at a final budget and timeline that will be used to guide the construction process. There will be a meeting with all stakeholders (contractors, architects, utilities, etc.) to discuss any potential issues and solutions to resolve them. Remember to keep all the documentation like permits, regulations, and deliverables influencing your budgeting decisions organized and ready for submission. Documenting and submitting paperwork enable owners to know where unexpected costs in a construction budget can arise.
Phase 4 – Construction and Closeout
Actual construction and closing out process is the longest phase of any project. Track and analyze the building process and investigate if all costs incurred for each construction activity are closely following projected costs and schedules or not. Identify the possibility of unexpected costs beforehand and devise alternative solutions.
For example, you budgeted $100,000 for installing plumbing lines. Unfortunately, the concrete prices went up nearly 25% costing you an extra $25,000 on the slab foundations. By tracking such extra costs, you will be able to better estimate future construction budgets and determine which elements are prone to fluctuations. Finally, prepare punch lists, closeout checklists, warranties, and any closing inspections.
Construction budgets remain influential even after a project is complete. Contractors can get valuable insights from past budgets that push them to improve their estimating, scheduling, and project management skills.
5 Effective Tips for Staying Under Your Construction Budget
The key to staying under your construction budget is having access to updated data, working with reliable subcontractors and suppliers, and thoroughly understanding the scope of work. By using innovative technologies and software solutions, construction companies can improve their cost estimation, budget tracking, and risk assessment processes.
Below are five expert tips for staying on track with your construction budget.
1. Estimate Accurate Project Costs
The accuracy of the cost-estimating process can make or break any construction budget. Calculate labor rates based on desired quality and competence, rather than just hourly or square feet metrics. Leverage relationships with suppliers to get realistic price quotes for your requirements. Moreover, hire trusted subcontractors who will provide detailed quotes to avoid underestimating your construction budget.
2. Invest in Construction Budgeting Software
Using construction budgeting or construction project management software will help you keep track of expenses and revenues without entering data manually. Construction budgeting software offers features like customizable budget templates, predictive analytics, and automated reporting. Further, integration with other tools and mobile access will simplify your financial management.
3. Communicate Clearly with Clients
Remember once your team has estimated the construction budget, always present and justify the grounds of those estimates to your clients. Whether they have any objections, changes in mind, or different priorities for the budget, clarify them during preconstruction itself. Throughout the project, submit updated cost reports to the clients describing resource use, number of person-hours, and other expenses in detail.
4. Streamline Change Order Procedures
Change orders can significantly affect any construction budget. Develop and streamline procedures for change orders like obtaining approvals and tracking cost adjustments. We recommend using cloud-based project management software for optimal collaboration and to make cost-effective decisions.
5. Regularly Monitor and Optimize the Budget
Commercial construction projects are prone to changes and so are their budgets. To keep your expenses under budget, regularly monitor and track incurred costs against the predicted costs, and make the required improvements. Engage and coordinate with owners, designers, engineers, and project managers to ensure the budget aligns with the project objectives.
5 Construction Budgeting Mistakes to Avoid
Poor construction budgeting leads to inaccurate estimates, communication breakdowns, delays, cost overruns, and low-profit margins, which can result in unfavorable project outcomes. Here are some common construction budgeting mistakes you should avoid.
1. Miscalculating Budget Costs
Underestimating certain aspects of project costs will create an incomplete construction budget. It’s a common mistake to miscalculate labor costs and material prices as they fluctuate over time. To prevent cost overruns, obtain bids from each of your subcontractors. Also, research the prices of your supplies and order them as early as possible.
2. Not Allocating Contingency Funds
Neglecting contingency funds in your construction budget can result in client frustrations at the end of the project. As a safe practice, plan for unexpected expenses such as scope creep, rising material or labor costs, and change orders. Additional costs due to errors and reworks should also be considered. This will create an accurate construction budget with fewer cost overruns.
3. Weak Budget Monitoring
Construction managers who don’t follow budget monitoring practices throughout the project often face budget overruns. Construction costs can quickly increase if not properly managed, leading to expensive budgets, delays, and stakeholder disputes in the construction process. Hence, it’s necessary to constantly monitor that your estimated costs match your incurred costs.
4. Poor Communication
If you establish ineffective communication channels during preconstruction, unexpected costs can delay your project later. In fact, almost two-thirds of construction projects fail to meet deadlines because of lack of communication. Make sure your team and subcontractors understand how to track and transmit information. Maintain strong relationships with clients and keep clear documentation regarding the scope of work.
5. Not Keeping Spending Records
Creating a budget goes to waste if you don’t maintain proper records of expenditures. Although the commercial construction team develops an accurate budget before work begins, there’s still a chance of overspending as the project progresses. These small oversights can pile up and drastically affect the construction budget.
Analyze commercial construction projects that faced challenges because of wrong budgeting decisions and learn from past mistakes.
Construction Cost Estimating and Management Software
Construction estimating software is a computer solution designed for contractors to estimate costs for a specific project. A construction cost estimator will use budgeting software to estimate bid prices that will eventually become part of the final budget.
Software Applications and Programs
Unlike traditional Excel spreadsheets, contractors don’t have to wade through complex codes or formulas as the worksheet in the construction budgeting software does all the calculations. You can quickly figure out accurate materials and labor costs while making adjustments so that you have enough overhead to make a profit. Since these construction budgeting software come with a cost database feature, you get the latest market prices for building materials.
The popular apps for construction cost estimation and project management are –
- All-In-One Calculator Free
- PlanGrid
- Houzz Pro
- Contractor Foreman
- CoConstruct
- Fieldwire
- DEWALT Mobile Pro
- Autodesk BIM 360
- Punch List & Site Audit Report
- Procore
The construction budgeting software also offers pre-built construction project budget templates to help you create professional quotes. The platform integrates contract management, payment applications, and change orders into a single workflow. Other prominent features in construction estimating software are item lists, resource costs, detailed overhead, markups, and project reports.
These are some of the popular construction budgeting software available today.
- Procore
- Esticom
- Clear Estimates
- Buildertrend
- ProEST
Excel Spreadsheet Templates
Excel templates for construction budgeting and management are ready-made spreadsheet layouts with predefined formulas to report data. They are traditional methods of construction estimating software used for budget tracking and management. There are different types of construction project templates designed for multiple purposes. Some of them are –
- Construction budget templates
- Timelines
- Punch lists
- Documentation trackers
- Inspections
- Logbooks, and many other construction budgeting templates.
Conclusion
Budgeting for construction is an integral part of any building project. Having a budget ready brings steady cash flow, keeps the project’s financials on track, satisfies investors, pays workers, and ultimately helps to deliver a successful construction project. Understand your client’s requirements, work with trusted industry professionals, and embrace the latest project management systems for construction budgeting that maximizes profits.
At Constructive Solutions, Inc., we can help you identify the appropriate construction budget for your construction project that will serve you throughout the project’s lifecycle.
FAQs
Do cost calculators help in construction budgeting?
Yes, cost calculators or software help in estimating project costs and profit margins, however, they may not count all the variables that affect construction budgets. For example, permit costs, real-life market prices for labor and materials, legal fees, and unexpected expenses.
What are the types of budgeting in construction?
These are the four main types of budgeting methods that construction companies use:
- Incremental budgeting
- Activity-based budgeting
- Value proposition budgeting
- Zero-based budgeting
What are the latest trends in construction budgeting?
Lately, we can see the following top emerging trends in construction budgeting:
- Parametric estimation
- Building Information Modeling (BIM) for cost estimation
- Use of Artificial Intelligence (AI) and Machine Learning (ML) for real-time cost models
- Integration of Data Analytics
- A focus on sustainability and green building practices
Relevant Resources:
- How Your Commercial General Contractor Can Help Reduce Costs
- Tips on How to Control Office Tenant Improvement Project Costs
Constructive Solutions, Inc. is a full-service commercial construction company serving San Francisco and Bay Area.
Whatever your vision, we have the resources, experience, and insight to make your concept a reality, and a space where your business can flourish.
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