Just like machines cannot run without fuel, construction projects cannot kickstart without finances. Cost estimation and budgeting are effective tools that lead to a project’s success. It’s a known fact that construction projects are of a dynamic nature and therefore, unforeseen circumstances can greatly affect the stipulated budget. Nobody can estimate a budget that 100% caters to the requirements of the project. Even 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.
Construction is a time-sensitive industry, requiring precise scheduling of milestones and their associated costs. For on-time completion of the project and its smooth execution,
contractors need to plan and follow a thorough 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?
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.
General contractors have to present a detailed budget plan to stakeholders and investors prior to approving the construction project. Different factors impact construction cost per square foot like materials, labor and official documentation, profits, and overheads. Ideally, you should allow breathing room for unexpected costs, including accidents, damages, or inflation of material costs. Clearly laying out a realistic budget before clients helps to provide value and predict the return on investment.
The ideal 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 Construction Budget
|COMMERCIAL CONSTRUCTION BUDGET|
|Hard Construction Costs (8,000 SF @ $97/SF)|
|Foundation, Framing, Drywall, Flooring, Roofing||$581,000|
|Plumbing, Electrical, Security System||$80,000|
|Fixtures, Furnishings, Equipment||$50,000|
|Sub-total Hard Costs = $775,000|
|Soft Construction Costs|
|Architect and Engineers||$31,000|
|Sub-total Soft Costs = $35,000|
|Total Expenses = $895,000|
|XYZ Corporation (in-kind)||$25,000|
|Other Corporate Donations||$25,000|
|To Be Raised From Other Sources||$70,000|
|Total Revenues = $895,000|
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 or renovation or expansion of an existing building, undertaking construction budgeting is indispensable.
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 budget helps contractors accurately determine the funds necessary to accomplish each task.
When you have properly planned 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.
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 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.
Provides Cost Estimation
For successful budgeting, you need to understand the costs associated with each aspect of the construction project. This will be critical when procuring funds and allocating them for various tasks, making sure you complete them according to clients’ expectations. Building materials and equipment, labor, location, project timeline, and building codes are some of the 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 or additional funding is acquired.
Construction budgeting creates realistic guidelines for project team to strictly follow and ensure every task is finished within budget. Your team should update you with daily reports so that you can update cost plans regularly. Prepare detailed cost reports describing equipment usage, materials use, spent person-hours, and share them with the client. Ensure that the whole team is informed of real-time data on project’s progress through emails or other forms of communication.
One classic way of making an organization efficient is to set SMART goals and track key performance indicators (KPIs). Budgeting improves project management by forcing 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 estimated costs are lowered with the same outcomes.
While developing a budget for construction, 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.
Three Essentials of Construction Budget
The best practice is to divide a construction budget into three essentials – hard costs, soft costs, and profits.
1. Hard Costs (Direct Costs)
As their second name suggests, hard costs comprise expenses directly connected to the actual building work and development. They represent the cost of tangible aspects such as –
- Equipment Costs
- Material Costs
- Labor 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. Having a clearly defined 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 them 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.
Construction soft costs can be –
- Design/Architecture Consultants
- Land Surveys
- Legal Fees
- Temporary Facilities
- Accounting Fees and Taxes
- Construction Organization Costs
- Project Operation Costs
A construction budget’s profit is the difference between the money you received and the actual costs you spent on the project. Good budgeting means mentioning revenue and profit predictions alongside expense forecasts. The amount of profit can vary depending on the scope of your work, potential costs, contractual agreements, or project budget management techniques.
Another benefit of this documented information is you will have an explanation ready when additional expenses arise. This creates a good synergy between contractors, accountants, and owners.
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 construction project, you need to include different types of expenses, as elaborated below.
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 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 are still critical to getting jobs done.
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.
Unlike others, materials expenses are negotiable. 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
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.
Insurance and Bonds
Every construction project is legally subjected to insurance coverage and the costs related to liability protection. Depending on project’s size and complexity, you may be asked to pay a deposit or bid bond. This will guarantee your commitment and assure 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.
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 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 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 that will be 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, 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 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 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 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.
Cost Estimating and Management Software
Construction estimation software is a computer solution designed for contractors to estimate costs for a specific project. A construction cost estimator will use 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 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 software applications 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
- Houzz Pro
- Contractor Foreman
- DEWALT Mobile Pro
- Autodesk BIM 360
- Punch List & Site Audit Report
The construction budgeting software also offers pre-built 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 are item list, resource costs, detailed overhead, markups, and project reports.
These are some of the popular construction software available today.
- Clear Estimates
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 estimate software used for budget tracking and management. There are different types of templates designed for multiple purposes. Some of them are –
- Construction budget templates
- Punch lists
- Documentation trackers
- Logbooks, and many other construction budgeting templates.
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. Poor budgeting leads to inaccurate estimates, communication breakdowns, delays, cost overruns, and low-profit margins, which can result in unfavorable project outcomes.
The key to planning realistic construction budgets 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.
At Constructive Solutions, Inc., we can help you identify the appropriate budget for your construction project that will serve you throughout the project’s lifecycle.