Pulling off a construction project without a hitch involves a lot of planning. From hiring your crew to finding the best materials and keeping everything on schedule, project owners must be very organized.
Of course, all these things require capital. To ensure you don’t run out of money before completing your project, you must also plan your budget.
How is this done? Through a process called construction budgeting.
As simple as it sounds, construction budgeting can be a challenging endeavor. This comprehensive guide will provide the information necessary to create a realistic construction budget.
A critical part of construction project management, the construction budget is the monetary plan to ensure your project can be completed.
It considers the cost of materials, labor, regulatory fees, and much more. It is always best to keep a certain amount in the construction project budget for unexpected expenses.
In the construction industry, many different heads come together to create a project team.
From the architects, engineers, general contractors, and subcontractors, everyone needs to be aware of the project’s parameters for it to succeed.
The construction plan will also include the total budget that all personnel will work with. This budgeting process is vital for the following reasons:
When the initial project plan is presented to stakeholders, they will inevitably all have the same question:
“What is this going to cost?”
To get approval to move forward, you’ll be expected to provide a construction estimate regarding expenditures. Stakeholders will want to understand the initial investment amount vs. their expected return.
A comprehensive presentation of the forecasts of project costs, including a contingency budget, will help them decide whether to give the green light.
Of course, it is only possible to estimate costs at the initial stage of the construction process. Potential issues along the way can change the actual costs of the project.
An accurate budget breaks down the various costs and allotted budget to ensure that all team members know how much money to work with.
Architects will design the structure to fit within the allotted budget. Contractors can make material purchasing decisions based on it as well. And realtors can find a worthwhile property.
Without a budget to follow, the cost of construction can quickly get out of hand, putting you in debt if your cash flow dries up. If you run out of funds, the project can come to a halt.
On the flip side, budget management can help you save money. Keeping a close eye on your funds can reduce unexpected costs and minimize overruns.
The budget will determine how much can be spent and where. When one aspect of building costs more than expected, another area can be adjusted to balance it out.
The amount allotted to labor costs will determine the amount and skill of labor that can be afforded. It also allows the construction company to prioritize essential tasks over those of lesser importance.
Budget management includes clear documentation of every stage of construction. Cost allocation and documentation of unforeseen expenditures explain a change order and get approval faster.
Within the construction budget, there are four different types of costs. These include:
Otherwise known as hard costs or project overhead, direct costs are directly linked to the project.
Materials are one of the most considerable direct costs on a project. This includes purchasing all materials needed to construct that specific structure, including scaffolding and equipment.
Labor costs are another big ticket in the direct costs of a project. The payment of all labor involved, from site preparation to finishing touches, factor in.
Permitting, temporary toilet facilities, and surveying are also part of the direct costs of a project.
Indirect costs are also known as soft costs or main office overhead. These expenses can’t be directly linked to a specific project but are costs nonetheless.
This could be:
Costs that stay the same no matter the scope of work are called fixed costs. Rentals, design fees, site acquisition fees, and taxes are all examples of fixed costs.
Variable costs can fluctuate due to the scope of construction.
The amount of materials used, hours of labor paid, and energy needed to power the structure’s construction can all fluctuate depending on the scope of work included in the project. Understandably, variable costs can be more challenging to determine.
So, how is construction budgeting done?
Contrary to popular belief, it isn’t an initial process but a continuous effort throughout the project.
Here are the four steps to calculating and following a construction budget:
Before you get started, you’ll need to set a baseline for how much potential investment you have to work with.
Contact your CFO for an explanation of the company’s overall cost structure. This will help you to have a broad understanding of the types of expenses you will be facing.
Once you know the potential capital you may allot to this project, you’ll want to identify its goals and objectives.
Answer the “why” and “what” of the project before the “how.”
For example, why has the company decided to embark on this project, and what value will it bring?
Once you understand those, you can determine how to build this structure to meet those objectives.
In this phase of budgeting, you must research permitting and safety regulations. What are the permitting fees? How long does it take? What are the potential safety hazards, and what is the cost of mitigating them?
If the site has already been purchased, evaluate it. How much excavation is needed? Will there be any special design requirements due to slope or soil conditions?
If the project site still needs to be purchased, you can search for ones that will incur the least cost for preparation.
Next, you need to do inventory. Identify your limitations and make a list of all resources already available. This will help you to determine the potential scope of the project.
With this data in hand, meet with all stakeholders and team members. Discuss creative options with the architects, and have the engineer assess the design.
After considering several options, present your chosen design to decision-makers — with a cost estimate.
Once the design is agreed upon, list materials and labor needs. Finalize the budget and timeline with a detailed SOV (schedule of values).
With architectural and engineering drawings available, seek and vet potential contractors before opening the project for bidding. This will cut down on the number of bids and significantly improve the efficiency of the bidding process.
You may decide to hire a construction manager to oversee the project. This would undoubtedly incur more costs, but your project could be pulled off like a well-oiled machine with the right construction manager.
Accept bids, choose your team, sign all contracts, and share your proposed timeline and budget. Apply for all necessary building permits by submitting all paperwork and payments. Have your demolition team do a site inspection and proceed with demolition and excavation.
Although often undervalued, this sitework construction is critical to creating a strong and structurally sound project.
Finally, begin construction with a close eye on progress. Identify potential problem areas and discuss with the team to find a solution.
Keep a detailed change order log. This will ensure there are no hiccups in the schedule. Also, track materials and deliverables to ensure you don’t run out. Again, this will help keep the project on schedule.
Finally, perform frequent inspections, especially when contractors request payment. Be sure to follow the closeout checklist and check the punch list.
It is always best to use construction cost estimating software to keep things accurate, efficient, and consistent.
There are several benefits to using construction management software for construction budgeting. A few include the minimization of human error, integration with other company software, and giving you an edge over the competition.
Here are the top software programs to use in your construction budgeting process:
Along with its seven free budgeting templates, Archdesk offers an easy-to-read interface with all the features a company could need for construction budgeting.
It’s also a project management software offering production control, workflow management, scheduling, and much more.
ProjectSight allows users to track expenses, purchase orders, payments, and contracts.
Procore is a big name in the construction industry, with solutions to more than just budget control, such as workforce management, construction intelligence, and even insurance.
It only seems logical that they would know what a construction budgeting program would need. One of their standout features is the automatic monthly forecasts based on current financials.
One of our favorite features of Projectmates is the bid management software, which they claim reduces the bidding processing time by 87%.
Created by AutoDesk, ProEst is an all-encompassing project management software that offers conceptual cost estimating.
It provides accurate forecasting, instant updates, and predictive cost analysis from past projects.
So many programs are on the market, and each claims they are the best. To find the right tool for you, there are a few critical aspects to research.
Answer these questions to find the best choice:
As diligent as we try to be, we all make mistakes. But when you are aware of the most common mistakes that others make, you have a better chance of avoiding them.
Here are some to look out for when it comes to construction budgeting:
The bottom line isn’t the only thing to consider when making purchase decisions. Choosing low-quality materials or labor to cut expenses can cost more in the long run.
Instead of starting from the ground up, use past projects as examples.
The information from prior estimates and final prices can be used to improve your cost estimation for your new project. This reduces estimation time and increases accuracy.
Construction projects are a large undertaking involving many team members and lots of data. Good communication is crucial for this process to work.
You may need to increase the size of your administrative team if they are overwhelmed and can’t handle the workload.
As we’ve already highlighted, project management software can help avoid human error, but you should always be sure there are many hands to lighten the load. Administrative mistakes due to a lack of personnel can have catastrophic repercussions.
With all the moving parts, keeping your project on budget can feel overwhelming.
These tips can help:
Frequent and thorough budget reviews reduce overspending by finding money draws and cost-reduction opportunities. They also help identify potential risks ahead of time to allow for mitigation before it becomes an additional cost.
Budgeting software, such as one of those listed above, helps provide real-time updates and keeps the entire team informed — without constant meetings.
When it comes to change orders, be proactive. Have a plan in place.
Instead of hoping you don’t have any, expect them and include a generous amount to cover them in your contingency expenses.
An accurate and detailed construction budget is critical to a successful construction project. Although the project owners are responsible for determining the budget, all involved in the undertaking will affect how well that budget is followed. Choosing a responsible construction team can make a big difference in how well you stick to your budget.
Contact FMP Construction for that responsible team.