Cost estimation and budgeting are essential to ensuring that your construction projects run smoothly. Each budget will affect important areas of the project including the level of skill you can hire, the types of equipment you can use, and how quickly you can complete the project.
A well-made, accurate budget is thoroughly planned so that you can maximize efficiency and productivity while keeping overhead costs down. It improves projects by forcing the design team to create practical solutions and keeps the owner’s expectations reasonable so they know what to expect. As construction projects change over time, regular oversight and periodic updating of the cost estimate, and budget are vital to keeping a project budget on track.
In this guide, we’ll cover some of our best practices for planning your project’s budget, and what to account for when drafting it up.
Planning Your Construction Budget
Developing the Initial Budget
A total project budget should be developed as early in the project as possible. It’s good practice to have the first budget ready at completion of the schematic design phase when the drawings are about 20 percent complete.
This only offers a limited set of information, often consisting of simply a site plan, floor plans, and key elevations, but if used properly, it is a key technique for cost planning in construction. The owner’s full program should be accurately identified, documented, and communicated to the project team. After the initial budget is established, it serves as an essential tool for managing the rest of the design to meet the owner’s budget requirements.
There are a variety of ways to plan a project budget. One of the most common methods is to divide expenses between hard and soft costs.
Your soft costs are any expenses that aren’t directly related to the physical building of the project and they tend to account for 30 percent of a construction project’s total budget.
Hard costs are the expenses directly related to the construction of the building, road, or other physical structure of the project. These costs tend to account for the other 70 percent of a project’s budget.
Because hard costs consist of physical objects, they are usually easier to estimate and control. Soft costs on the other hand are more difficult to estimate because service fees can vary quite significantly.
Splitting your construction budget into these two categories from the beginning makes it easier to manage your budget as you can get a quick sense of all the expenses in each category. This will help you identify any potential costs you may have left out.
What To Include in Your Construction Budget
Material and labor account for the majority of overhead expenses but they do not give a full picture of what to include in your budget. Both medium and large-scale construction projects need a schedule that includes associated costs at every milestone. This schedule acts as a financial control and will help the project stay on time and under budget.
When planning your construction projects, here are the important expense types to consider for your estimates and budget.
Property costs can vary significantly depending on location and project scope. In high-value areas, land can account for up to 60 percent of a project’s budget. In low-value areas, land may make up 10 percent or less of your budget.
For accounting, land is considered a capital cost, a one-time expenditure that will continue to contribute value for more than a single financial year. Land acquisition costs are an important part of a construction project’s budget as they allow you to assess the project’s profitability when it is complete.
2. Professional Fees and Services
Construction projects tend to require a variety of professional consulting and other services. These services will result in different fees that will accumulate over the course of the project including:
- Building and occupancy permits from local governments
- Architectural and design services
- Surveying, studying, and testing fees
- Professional engineering stamps
- Accounting and real estate fees
Having thorough and accurate design plans is critical to understanding the different services you will need and the total cost of your project. Drawings define the scope of the work and without well-made plans, you can run into serious overruns.
Every construction project will require a variety of different equipment and tools. Your equipment can be either hard or soft costs depending on how it is used. Any equipment or tools that you already own are considered capital expenses for accounting purposes.
Contractors should use their materials and labor lists to determine the types and amounts of equipment and tools needed for the job. This may require renting their equipment from suppliers in their area. For construction projects that require heavy equipment rentals, the true cost of renting equipment takes into account several expenses such as rental fees, delivery costs, operating costs, fuel costs, and any maintenance that is your responsibility.
Determining and communicating labor cost estimates with employees is essential to keeping production on track and on budget. That being said, construction labor costs are one of the most challenging expenses to estimate. Before the project gets started, it’s hard to forecast the exact amount of hours workers will need to complete the job.
When planning your labor budget, remember to account for the true cost of human resources including:
- Wages both for employees and subcontractors
- Workers’ compensation costs and payroll expenses for employees
- Vacation time and sick time for employees
- Non-productive time and re-work (can also fall under a contingency budget)
Material expenses are any area where you can lower costs and derive more value from your project. This is because contractors are able to build relationships with suppliers where they can negotiate costs based on volume.
Material expenses usually make up the largest portion of any construction budget so you’ll want to review them carefully. While you want to lower costs, you do get what you pay for so always look for quality material that meets your budget and gets the job done.
6. Project Management
Construction projects need highly skilled and organized project management teams. Project management costs will include the salaries of your team members, office expenses, safety supplies, and security staff.
You’ll also want to consider costs such as management software, accounting tools, office rent, utilities, and internet. While these may be capital expenses, it’s still important to factor their use into any construction budget.
7. Utilities and Taxes
Depending on the project, you may need water, gas, sewer, and electrical installations. These utilities have their own associated permit and hookup fees that must be factored into the project budget.
Your project may also be subject to local and state taxes. Tax rates will depend on the scope and nature of construction, with bigger construction investments being subject to more tax. You’ll want to work with an accountant who has experience in construction finance to ensure you’re properly accounting for all taxes.
8. Liability Insurance
Professional liability insurance is a mandatory cost that must be factored into the project budget. Depending on the nature of the construction project, you may also be required to pay a deposit to guarantee your company will follow through with the work.
Payment and performance bonds are also required on certain projects such as government contracts. These bonds ensure that all subcontractors, tradespeople, and suppliers will be paid, If you belong to any builders or contractors associations, be sure to add their membership costs to your budget.
Unforeseen costs are common with construction projects so it’s critical to include a contingency budget in your cost schedule.
A contingency budget is funding set aside specifically to pay for any unexpected expenses that arise after the project begins. It prevents costly delays in production because it gives you the capital to get back up and running no matter what happens. The contingency isn’t allocated to any particular category of costs and can be used to cover any type of expense that comes up.
It’s good practice to have a contingency fund somewhere between 3 and 10 percent of the total budget. Depending on the scale and nature of the project, your contingency fund may be as high as 20 percent of the budget.
Create More Accurate Budgets With the Best Estimating Software
Costminer is the affordable construction management software that allows you to plan more accurate budgets with ease. The system is easy to use and streamlines the way you create estimates and manage takeoffs onscreen in real-time. All data is safely stored in the cloud and you can collaborate with your team members via multi-user support.
Get started with a 30-day free trial of CostMiner today, and ensure your project stays under budget and on-time.