Construction budgeting 101

Construction projects, by their very nature, can be burdensome, both financially and logistically. Yet a project’s success often hinges on creating and sticking to a comprehensive budget. Creating a construction budget allows you to prepare for potential delayed completion dates, owner modifications, unforeseen structural problems, and other hidden costs. A little time spent estimating construction costs saves a lot of time (and money) in the end. Insufficient planning is one major reason why projects fail!

Project planning and budgeting

The first major step in creating a budget is to sit down with the client/owner of the project and discuss specifics of the project. The owner should have an achievable vision for the property, including its primary use, general design ideas, desired completion date, and a rough cost tolerance.

One should gather as many specifics from the owner as possible to ensure that the estimated construction costs are relatively close to the finalized budget. Once the budget approaches finalization, you should begin blueprint drawings, either through internal means or via a contract with an outside vendor. Note that this budget – even if not completely finalized – may later be used as an effective tool for measuring how the project is performing at a given point.

Basic budget considerations

Though some construction projects may be more complex than others, you may find the following list of general budgetary considerations helpful:

• Permit issues include adequately addressing permitting involving zoning, survey, land disturbance, electrical, mechanical, plumbing, environmental, and department of transportation.
• Insurance considerations include whether general liability insurance is sufficient or whether job-specific or business-specific policies are necessary. Also other important policies are builder’s risk, wind, flood, and inland marine for materials purchased but not installed.
• Blueprint drafting and review issues include payment to architects and engineers, engineering, design and development of a bid set, client review and review times at any given municipalities.
• Interest and fees may be difficult to estimate, but managers should account for legal and management fees.
• Site preparation may include the cost of excavation as well as labor and machinery costs as well as erosion control and monitoring of erosion control.
• Foundation issues include soil condition, stability of ground, and compaction requirements.
• Exterior considerations include windows, doors, seismic zone, and insulation (sound or temperature) requirements and design and review boards for local city.
• HVAC issues include accounting for building type, height, occupancy, and other special system requirements, load requirement and manufacturing city.
• Interior considerations include floor-to-ceiling heights, spatial area, and special finishing requirements.
• Contingency allowances are a way to account for unforeseen costs. A good rule of thumb is to reserve at least an extra 5% of the budget for such costs.

Other considerations include surveying, mechanical, electrical, and plumbing services, water and sewage, utilities, window treatments, and appliances.

Cities often maintain “contractor checklists” for plan submissions, so you may be able to decide in advance whether some line items are necessary. It’s part of your job to consider city, county, state, and federal code compliance issues that the owner may not have considered.

Hard vs. soft vs. site costs

When estimating construction costs, it’s helpful to think of the different types of costs: hard, soft, or site.

• Hard costs

Hard costs account for the actual physical construction of a project. For example, excavation and site preparation, plumbing, window and door, mechanical, and electrical costs are all hard costs. You must include not only the cost of materials in your hard cost estimates, but also the labor and equipment costs required to utilize those materials.

• Soft costs

Soft costs may be less readily recognizable, but they are equally important when estimating building costs. Fees (such as legal, design, management, etc.), insurance, financing and interest costs, taxes, and even LEED Certifications, if applicable, are all soft costs worth considering.

• Site costs

Site costs can include land costs, surveys, the demolition of any structure impediments, and environmental compliance measures.

Unforeseen costs

At some point during the building process, you are sure to encounter several surprise costs. Minimizing these costs up front can lead to increased efficiency and a greater likelihood of meeting the completion deadline.

Codes & restrictions

Understanding the applicable government building codes is paramount. Plumbing codes may dictate restroom and water fountain requirements. Fire codes may prompt analysis of whether existing structures are sufficient or whether upgrades must be made. Environmental restrictions may limit the type of HVAC system that can be implemented.

Combating unforeseen costs

In general, budgeting is helpful, but not foolproof. Ideally, the 5% contingency allowance that you set aside during your preliminary budgeting process will account for your surprise costs. Your job as the construction manager involves oversight in all phases of design and construction, and if you are diligent in that regard, then omissions or errors are unlikely to be as common. Better communication with team members in the early stages of the project can also be advantageous: sharing goals, plans, and even blame creates a unified approach that may not show up in your budget but remains vital to your project’s success.

Conclusion

Thorough budgeting with thoughtful estimates allows for an efficient design and construction process, while inadequate budgeting may lead to omissions, errors, delays, and even incompletion. The keys to successful budgeting are: getting a clear and achievable vision from the owner; familiarizing yourself with all relevant government building codes; understanding which line items are necessary and which are flexible; accounting for hidden costs; and being flexible with your budget.