How to Create a Construction Project Budget

Construction project budgets notoriously go over budget; whether that’s because of construction technology, unforeseen challenges, or poor planning. Better estimates and better budget management are the driving force in the creation and perfection of a construction project budget. As Matti Siemiatycki points out in his study, Cost Overruns on Infrastructure Projects: Patterns, Causes, and Cures, that estimators tend to underestimate the time and costs needed to complete a project. With that in mind, this article will simplify the steps of creating a construction project budget and how to address common issues that cause overruns.

Article Highlights

— Components of a Construction budget

— Basic Budget Considerations

— Hard Costs vs. Soft Costs

— Contingency Budget

— Construction Project Budget Management

What Goes into a Construction Project Budget?

A great many items that go into a construction project and the list of reasons why projects frequently run over budget are numerous.  For example, inadequate budget and project management, inaccurate project estimates, design errors, lack of contingency budget, administration errors, are some of the common mistakes. On the flip side, project managers need to consider the cost of construction, property, related fees and taxes, planning costs, insurance, and the contingency budget when preparing the budget. Along with extensive research, cost determination, development, documentation, and proper management can aid the project manager in creating an accurate construction project budget.

Basic Budget Considerations

Construction projects will vary in complexity because they range in size, scope, and type. The list below of budgetary considerations might be helpful for a range of commercial projects.

— Contingency allowances: best to set aside 5% for the unseen costs that have yet to be determined

— Exterior: issues with the outside of the building that include walls, windows, doors, design, and insulation (sound and temperature)

— Foundation: may deal with soil conditions, excavation, and ground stability

— HVAC: (Heating, Ventilation, Air Conditioning) may include height, building type, building dimensions, and any other unique system requirements

— Insurance: considered under soft costs, but may include builder’s risk that needs general liability insurance or specific policies

— Interest & fees: these might be difficult to estimate, but proper bookkeeping will account for legal and management fees

— Permit: addresses the correct permitting for DOP (Department of Transportation), electrical, environmental, mechanical, plumbing & zoning

Project Research and Analysis

Like with any project plan, research helps project managers develop their construction project budget. Research helps determine what will factor into the final cost of the project. The first step to creating a project budget is understanding the project. Knowing what the goals and requirements of the new building are will guide the project. Next, things like site conditions, cost of resources, design options, and existing documentation develop the specifics of the project. These help set realistic expectations for the project if the site conditions or code requirements might change the overall costs.

Project Development

Once projects are through the research stage, they enter development, and this is when ideas become models and designs. From here, an architect or owner chooses the final design, and the project designer or manager must create a requirements list. In this project development phase, including the required materials and estimated project costs is essential. Using final costs from similar projects and in similar areas can also help the manager prepare a better cost estimate. These estimates provide two important sets of numbers. It tells the project manager how much a bid should actually be. But it also provides a good foundation for setting a contingency budget.

Pre-Construction and Documentation

This might seem like an unusual step in developing a budget; however, since one is typically put together before the pre-construction phase, this will help prevent as many issues down the road. By talking to all stakeholders involved with the project, a project manager can pinpoint any possible issues or hold-ups. From there, they can find fixes or other ways to resolve the problems. Proper documentation gives the project manager a chance to see where unexpected costs could occur and estimate the true value of these items.

Hard Costs vs. Soft Costs

Many costs fall under two common categories: hard and soft costs. There are many costs associated with a construction project, and it’s challenging to know which cost goes with what activity.

Hard Costs

These costs are also known as “Brick-and-Mortar costs.” They encompass the actual physical construction of a building, the construction site, and the landscape. These costs cover material and labor that incorporate the development of a building. Examples of material costs include carpet, cement, drywall, fertilizer, grass, & utilities. Examples of labor costs include carpentry, grading, landscaping, paving, & site excavation. Other examples of hard costs that don’t go directly into material and labor are physical systems in the construction process like HVAC systems and life safety systems. Hard costs are easier to recognize because they are materially expressive because you know how much you need before the project begins. IMPORTANT NOTE: hard costs are incurred once the project is completed.

Soft Costs

Soft costs are less evident than hard costs because they are often invisible. These costs are harder to estimate because they are intangible and not directly related to labor and material for the buildings. Typical soft costs include architecture, accounting fees, engineering, inspection, legal fees, permits, and taxes. Another characteristic that differentiates soft costs from hard costs is that soft costs are also fees that are expensed after the completion of a project. This includes property and building maintenance, insurance, & security.

Contingency Budget

Project managers should draft the contingency budget after the project costs calculations and issue mitigation. A contingency budget is where change orders and other changes or additional costs are drawn. The contingency rate is what pads the budget and helps smooth any issues. While a typical contingency rate is between 5%-15%, it’s dependent on the level of comfort. Too little and many project expenses will come directly out of pocket, too high, and the ability to raise funds could take too long. However, a contingency budget isn’t just for unexpected costs, but also for owner change requests and design changes. These can add more value to a project’s total costs and create room in the budget to prevent these expenses from coming out of pocket.

Construction Project Budget Management

Management’s goal is to keep the project on time and on budget. While your plan should encompass most foreseeable and many unforeseeable events, careful monitoring of change orders and reports will help manage your budget. A study on Cost Overruns on Infrastructure Projects found that inadequate project monitoring was a cause of budget overruns. Without the appropriate oversight and control, it’s easier for projects to slip further off-budget. Implementing a strong job progress report to track project completion and performance should eliminate many budget overruns. While too many meetings can cause delays, project managers should be up-to-date on all projects and make changes as necessary.

Closeout & Conclusion!

Creating a construction budget is not easy, and there are many considerations to account for with this crucial aspect in construction. Project estimators and managers are going to do their best to estimate the budget with project research and analysis, project development, and available documentation. Construction costs affect the Return on Investment (ROI); therefore the budget must be thoroughly reviewed and assessed before starting. This guide for creating a construction budget will hopefully prevent going over budget, even given unforeseen circumstances and challenges.