Managing and budgeting for a construction project is a process that requires a lot of planning for a project's success. A project cannot take off without the necessary finances. Construction budgeting is a big undertaking, and even the best project managers often face challenges. It is impossible to create a budget that 100% caters to the realities of a project. This is because of the dynamic nature of construction projects and how changing conditions lead to changes in the construction plan. The construction industry is time-sensitive, and it needs proper scheduling of milestones and associated costs. For the project's success, the project stakeholders must follow a reliable construction budget. So how do you create a reliable construction budget and come up with the anticipated costs? This article will simplify the process of creating a construction budget.
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What is a construction budget?
The construction budget is the capital set aside for undertaking a project from inception to project closeout. It includes all the associated costs anticipated, and the funding usually is tracked using spreadsheets or construction estimation software. Since the budget is an estimate, it has to leave some wiggle room to cater to unexpected building costs. The best starting point when creating a construction budget is project plans and blueprints. Each project is unique, and associated costs depend on the type of project.
The importance of establishing a construction budget
Contractors and clients have financial obligations that they need to meet to ensure the project's successful completion. Since builders do not have an inexhaustible source of funds, it would be prudent to budget for different aspects of a construction project. Establishing a budget helps builders estimate costs by accurately determining the funds necessary to accomplish each project task.
A construction budget also helps prioritize the vital project components. For instance, if funds are not enough, a contractor can focus on the essential tasks and reduce the direct costs of excludable jobs. The budgeting helps establish goals and guidelines for the project. The project stakeholders can set restrictive budgets and alternatives to ensure that the project is completed on time and within budget. This makes it possible to keep a project on track.
One of the biggest causes of project delays is budget overruns. However, having a reasonable construction budget averts the overruns as you will have fewer unaccounted expenses.
The three parts of a construction budget
Regardless of the type of construction project, construction costs primarily fall into three basic categories. These are hard costs, soft costs, and profits.
Hard costs (Direct costs)
These are the costs directly associated with the construction of the project. We also refer to them as direct costs. Contractors determine hard costs from the prices they receive from suppliers and subcontractors. Examples of hard costs include equipment, labor, and materials.
Soft costs (Indirect costs)
We also refer to them as indirect costs. They include design and other expenses necessary for the project and its workers. These costs are essential for the project but are not directly linked to the building or its materials. Some soft costs include insurance, bonds, engineering, and legal fees. There are also costs for setting up temporary facilities in the project.
Construction is a business, and you need to secure your profits to stay in business. Profits refer to the difference between the money earned and the expenses spent. The profits depend on the type of project, scope, and contractual agreements.
Costs to include in your budget
Developing a construction budget is usually done during a project's bidding stage. Making a budget is tedious as one has to look at bid documents and project plans to determine the total costs. Depending on your company's role in a construction project, you need to include different kinds of expenses, as discussed below.
A large portion of the project's construction costs goes to materials. We usually divide these costs into site preparation costs and building structure costs. Material costs are negotiable depending on the contractor's type of relationship with the suppliers and the project's location.
These costs depend on the location and scope of the project. Some of the property-associated costs are real estate fees, taxes, and financing. Other property costs are permit fees payable either by the client or general contractor. Trade subcontractors in plumbing, electricals, and HVAC, in most cases, have to pay for their licenses. In some instances, the primary building permit covers all other subsidiary costs. Therefore, you need to know who is responsible for paying the permits and how much fees will be when making a construction budget.
This is the human resource cost needed for your projects: tradespeople, subcontractors, and equipment operators. Labor costs are the direct wages and include workers' compensation, sick leaves, and vacations.
The choice of equipment in a project depends on project type, labor, and materials. It would help if you also considered costs on renting, delivery, operating, and maintenance of the equipment.
Project management techniques help a project stay on budget by organizing and monitoring the budget. For project efficiency, there should be money allocated to a project for project management software. There should also be money for utilities, internet connections, and phone expenses.
Most contractors at any level need to show proof of some level of insurance for them to be licensed. Bonds are, however, specific to particular projects as they depend on the type of work to be carried out. Bonds are primarily common in government projects. We need to include these costs as a part of the construction budget in any project.
Depending on the location of the project, it is necessary to pay local and state taxes. The taxes depend on the scope and type of project. Other associated utility costs include gas, electricity, and sewer lines related to a building project.
We also refer to these costs as contingencies. It is the pool of money set aside to cater to unforeseen circumstances in a project. Depending on the contract type, either the client or the contractor carries the risk burden. Contingencies are applicable when there are changes in the project's scope or unforeseen site issues. Most projects have contingencies ranging from 5% to 7% of the total project cost.
How to create a budget
Creating a budget is always a tremendous undertaking, and even the most experienced cost estimators sometimes make mistakes. It is impossible to fully prepare for the realities expected in a project as conditions arise that create the need to adjust construction plans. This, however, should not hinder stakeholders from making budgets that are as watertight as possible. When creating a budget, it follows the following key stages.
You will first assemble your project team to help you in research as a construction budget takes more than one person to come up with. The project team will depend on the size and structure of your company. Generally speaking, construction projects are expensive, and you need to evaluate how to withstand overruns without going bankrupt. Research and analyze the project requirements, assess site conditions and any existing project documentation. This will help the team evaluate the feasibility of the project and whether it falls within realistic limits.
This is where you get to assess the project's potential scope. It would help if you met with the architects and engineers to draw on their expertise. Pitch your ideas to them and ask them to come up with drawing models. Most clients have no idea what goes into buildings and how much they could cost. However, after a sign-off on the drawings, it is possible to create a list of the materials needed and develop a budget. With such a budget, a client can now evaluate bids from contractors and finalize the project's timeline.
Before breaking ground and starting the project, all stakeholders need to meet, assess potential issues likely to arise and plan to resolve them. This reduces the risks likely to occur and keeps the project on track from the start. During this phase, the project team should adequately document everything. They should organize the permits, regulations, and deliverables, and you should prepare to submit the paperwork before they need it. This gives the developer a healthy headstart in your project. Documenting the paper trail helps one know where unexpected costs can come up from and the things to avoid.
How to control construction costs
Having good schemes for controlling construction costs reduces the chances of errors and duplicated efforts. It also leads to a lot of savings on time and money. There are several ways to control construction costs, and we will assess below some of the most effective approaches to construction cost management.
1. Use software
The use of software integrates cost control workflow such as contract management, payment applications, and change orders into one platform. Using cost management software gives a real-time outlook on a project's financial health and ensures teams have relevant and accurate project information. It centralizes all cost data and allows for flexibility in the customization of costs.
2. Update cost plans regularly
Your team should update you with daily reports and give you site reports of what is happening. This enables you to update your cost plans regularly. You can identify cost deviations at an early stage and avert them.
3. Submit cost reports to the client
You should make detailed cost reports from your daily reports and share them with the client. Ensure the cost reports have enough detail. They need descriptions of equipment usage, materials use, and expended person-hours. The client will also see the project's progress and prepare a backup plan if they note something that threatens the budget.
4. Ensure teams work within the assigned budget
You should keep the whole team informed as you have real-time data showing the project's progress. You can use email notifications to update changes on the project. Ensuring the team works on the assigned budget reduces the risks of budget overruns and duplicate work.
5. Plan budgets properly
You should set accurate costs from the start. Inaccurate estimates lead to lower profit margins, lost bids, and even damaged reputations. You can reduce the mistakes in cost estimation by using software that allows you to make project changes in real-time. This improves the efficacy and accuracy of the estimation process.
6. Streamline change orders
Change orders shift the course of a project in unexpected ways. For optimal cost control, you should streamline the change order process. You can use cloud-based platforms to improve communication and collaboration through the process and keep the team organized. This way, the team can make cost-effective decisions on change orders at any project phase.
7. Reliable subcontractors
Subcontractors are a common source of project delays and cost increases. It would be best to have a cadre of trusted subcontractors before starting your project. This reduces the likelihood of your project going beyond the budget.
Common mistakes to avoid
Besides the best practices discussed above, construction managers also make common budgeting mistakes. We have discussed some of them below.
Incomplete spending records
Even if the project team creates an accurate budget before the commencement of the project, there is still room for error as the project progresses. The budget is useless if we do not follow it and carefully record our expenditure. The little project details can add up and lead to significant changes in the project's budget.
Sometimes, we overlook some aspects of a job, leading to vague estimates. These vague estimates throw a project off-budget, and therefore the estimates should be double-checked to ensure everything runs smoothly.
Below are some of the answers to the frequently asked questions concerning construction budgets.
What percentage are soft costs in construction?
Soft costs account for about 30% of the project costs. This figure, however, varies widely depending on the project type. The more complex a project is, the higher the soft costs.
How does the construction budgeting process begin?
Construction budgeting begins when the client gives information to the project developer. With the help of the project team, the developer organizes data, and from it, the project team creates a construction budget.
The construction budget affects almost all aspects of a project. Getting it right leads to the best outcomes in a project. Using innovative technologies and software solutions makes it possible to improve cost estimation, budget tracking, and risk assessment. Reasonable construction budgeting solutions set up your project for success.