Budget: A Quick Guide (with construction example) -LinkedIn Motivator

Construction projects will never get off the ground without financing. Money sets the gears of construction management in motion. Creating a construction budget, therefore, is one of the most important pieces when developing a construction plan.

How do you create a construction budget, anticipate the costs for a project and track them to make sure you’re not overspending? Let’s take a look at what goes into making a construction budget.

What Is a Construction Budget?

A construction budget is an estimate of the money required to take a construction project from initiation to closure, including all associated costs and expenses that are accrued during the building process. While the budget is an attempt to forecast all costs in a construction project, you should leave some wiggle room to account for any emergencies or unexpected building costs.

Construction project managers start with the project plan, most likely a blueprint, in order to assess what materials will be required. Factors like job site preparation must be considered, which can include demolition costs, equipment rentals, permitting and inspection costs.

As the project execution begins, other costs begin to appear. There are labor costs and safety requirements for all on-site workers. Transportation can be another cost. Residential and commercial construction projects will also have unique costs. All these variables must be considered and calculated.

Why Is Construction Budgeting Important?

Chances are, you don’t have an unlimited fountain of money to work with. Instead, you have stakeholders that have invested in the construction project and want to get a profit—and going into any project without a budget is a sure way to spend too much money. That’s why you need a budget baseline that defines how much you can spend. Having a budget and Construction project plan go hand-in-hand with any successful project.

A construction budget is also a great way to Keep your project on track during execution. The more unaccounted expenses in a project, the longer it’s going to take to finish. Making a budget lets you take account of as many construction costs as possible and helps you stay on schedule.

Tracking those costs is a way project management software can help. Project manager is construction management software that plans, monitors and reports on your construction budget in real time. We have live dashboards, one-click reports and a robust online Gantt chart that can document your work breakdown structure, filter for the critical path and set baselines to compare planned costs against actual costs. Try Project Manager free today!

What Is Included in a Construction Budget?

In simple terms, a construction budget is just like any other budget, it adds up all the costs so that the project can be executed. Construction projects, however, have unique costs. So before creating a construction budget, it’s important to understand construction project costs, which fall into three basic categories:?

Direct Costs: This includes heavy equipment, materials and labor

General Conditions: These are indirect costs, which fall into three types: preconstruction costs, construction organization costs and project operation costs

Profit and Overhead: Profit is the difference between what you earned and spent, while overhead is operating expenses associated with running a business

In terms of what to include in your construction project budget, that depends on the project you’re working on. But in general, a construction budget should include the following:

Property: This cost is dependent on where you are building and the scope of your project. This includes the lot price, real estate fees, financing and taxes

Professional Fees and Services: These costs relate to professional consulting, including permitting, surveying, testing, architectural and design, master planning, structural, electrical, mechanical and civil engineering, accounting, banking and real estate fees.

Materials: Unlike other costs, materials expenses can be negotiable, especially if you have a relationship with your suppliers. Material costs tend to be a large portion of your construction budget and are usually broken down into two categories: site preparation and building structure.

Labor: This is the cost of your tradespeople, subcontractors, equipment operators and other human resources. Keep in mind not only hourly wages but also workers’ compensation, vacation and sick time.

Equipment and Tools: The material and labor costs will inform the selection of equipment and tools, which helps you determine what you’ll need to rent for the job. Remember to include delivery, operating, fuel and maintenance costs.

Project Management: Project management methodologies help organize and monitor a budget to avoid overspending. Consider the costs of construction project management, as well as any office space, utilities, internet connection, phone expenses and office supplies.

Insurance and Bonds: All construction projects are legally required to carry insurance. There might also be a deposit or bond required as a show of faith that your company is going to follow through and ensure all subcontractors, tradespeople and suppliers are paid. This is especially true if working on a governmental project.

Utilities and Taxes: This includes gas, water, sewer and electric costs associated with the building site. It’s also possible the construction project is subject to local and state taxes. These rates are determined by the scope and type of construction project you’re managing.

Contingency: Here is where you provide breathing room for your budget to absorb unforeseen costs and unexpected expenses. Some things that fall under this include changes in scope, design or material upgrades, machinery malfunctions, accidents and acts of God. Usually, your contingency fund is between three and 10 percent of your total budget.

How to Create a Construction Budget

To create a construction budget that’s an accurate forecast of how much the work ahead will cost, construction project managers follow these three steps:

Project Research and Analysis

To accurately forecast how much a construction project will cost, you must review historical data for similar construction projects, speak to suppliers and understand the project you’re about to start. Set realistic expectations by looking at resources, design options, etc.

Project Development

Research leads to the project owner or architect choosing a final design. The project manager uses this information to create a requirement list including materials and cost estimations. This informs the project bidding process, which is when the project owner chooses a general contractor and sets the framework for building the actual construction project budget

Pre-Construction and Documentation

Now the project manager should speak to the stakeholders. These highlights potential issues that can be resolved before executing the project. By documenting the pre-construction phase, the project manager has a paper trail to show where unexpected costs can come up. These potential costs can inform the construction budget.

Things to Avoid When Construction Budgeting

One of the biggest mistakes a project manager can make when creating a construction budget is inaccurate estimates. This can be made more problematic by not having a definitive project schedule in place before doing a budgeting forecast.

Also, when estimating, there’s a habit of only looking at the bottom line, which can lead to accepting the lowest bids from general contractors. The low cost might please your stakeholders at first, but if the quality of the work is poor, that pleasure will be short-lived. It can erode your reputation and end up costing more in the long run.

Just as important as the construction schedule is your plan. Not taking the time to make a thorough plan for your construction project will slow you down in the long run. You might miss dependencies, design flaws and more. This will delay the project and potentially bust your budget.

To avoid this, you can use construction scheduling software that’s equipped with robust project planning tools such as Project Manager so there are no discrepancies between your construction plan, schedule and budget.